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Demographic gold: changes for the country’s growth model

Demographic gold: changes for the country’s growth model

A new breed of workers is emerging in China, and this time it’s all about quality – not quantity.

 

 

For decades, China’s economic growth has been underpinned by a ‘demographic dividend’ in the form of an ample supply of labour. Today, this growth model is very much under threat. Wages are rising and there are labour shortages, largely the result of China’s decades-long one-child policy.

 

 

Many countries have experienced declining birth rates as their economies have developed, but the speed and magnitude of China’s demographic transition are unprecedented in world history. The UK took about 200 years to complete its demographic transition to low birth rates, and the US took 140 years; in contrast, China’s transition took only about 30-40 years. China has had the biggest surge in college-educated people in human history.

 

 

When China announced it was ending its one-child policy last year, in response to an ageing population, it was headline news around the world. But the truth is its ageing population problem already poses a threat to future growth and we think, relaxing the one-child policy is unlikely to have much impact on reversing the trend. Instead, future growth in China is likely to come from the educated population currently emerging.

 

 

China has had the biggest surge in college or university-educated people in human history. In 2010 only 3.9 per cent of its working population had a degree, compared with an average of 29.6 per cent in OECD countries. By 2015, the number of higher education graduates reached 7 million, almost eight times the figure in 1999, and up from 1 million in 2000.

 

 

Moving to high-end manufacturing

By 2030, estimates suggest more than a quarter (27 per cent) of China’s workforce will have a college degree, similar to the level in Germany, France and the UK. With the world’s biggest pool of educated labour – around 220 million by 2030 – China will be well positioned to compete in high-end manufacturing (such as aerospace and new energy) and modern services (such as finance & the creative industries), opening up vast potential for future growth. The surge in supply of skilled labour should support future growth in China. Standing in the way, however, are the country’s socioeconomic structures, which were designed to suit China’s old demographic profile.

 

 

An industrial upgrade is urgently needed to provide the fast-growing population of skilled workers with sufficient job opportunities. According to a study by Peking University, 49 per cent of college graduates in 2014 chose working in the government sector as their first option, partly because of the lack of opportunities in the private sector. A disproportionate number of China’s manufacturing firms still use old technologies suited to unskilled workers.

 

 

New growth model

Adopting skill-intensive technologies would allow companies to take advantage of the increasingly educated workforce and move to higher-end manufacturing, which generates wider profit margins and, importantly, jobs for the increasing number of new graduates.

 

 

There are widespread doubts about whether China can maintain high growth in the coming decades, especially against the backdrop of extreme bearishness globally. China is becoming less competitive in low-skilled manufacturing but a growth model of higher-end manufacturing will give the country its competitive edge in the next decade. And when you think about what China achieved with its unskilled workforce, imagine what its skilled workforce will deliver.

 

 

How Can China Develop & Sustain a Prospe...

How Can China Develop & Sustain a Prosperous Creative Sector?

By Kiran Patel for China Brain.

 

Background

Driven by the 13th Five Year Plan, Germany’s Industrial blueprint of Industry 4.0 and the government policies of Made in China 2025 and Internet Plus, China is embarking on an exciting journey into the New Industrial Revolution. The 4th Industrial Revolution in China will be driven by policies of innovation, consumerism and efficiency while at the same time maximizing transition towards high-tech, high-yield and low pollutant initiatives. Industry 4.0, Made in China 2025, Internet Plus and the creation of an Internet of Things (“IOT”) have become the key economic triggers of China’s long-term economic strategy. In defining the evolution from ‘Made in China’, to ‘Designed in China’, ‘creativity’ and ‘Innovation’ are the buzz words of President Xi’s administration. When examining China’s potential to develop and sustain a creative innovative economy, it is important to take a step back from the pre-conceived notion of cheap ‘Made in China’ knock-offs and occasionally maligned Intellectual Property (“IP”) practices. From the 4 Great Inventions of yesteryear fast-forwarding to present day innovative and practical mobile shared economy applications such as DidiDaChe, Alibaba’s incredible service integration of E-Commerce, Logistics and Financial Services and integrated ecosystem m-commerce and social media platforms such as WeChat, China certainly possesses a culture of continual innovation and execution.

 

 

With China expected to exceed well over 700million netizens by the end of 2016 and exhibiting phenomenal potential for further growth and penetration, the possibilities for creative sector growth are vast. In addition, possessing a burgeoning Urban Middle Class with growing disposable incomes that have risen to around 27,000 CNY per annum on average according to the National Bureau of Statistics and an incredible appetite for technology and innovation both in terms of products and services among consumers, China is ready to embark on its second economic miracle, with creativity and innovation forming the bedrock. However with such rapid development and exciting opportunities for China and businesses operating within the scope of the key focus areas of the new economic policies of the Xi Jinping and Li Keqiang administration come two caveats.

 

 

Firstly, how can China develop and sustain a society that encourages creativity and innovation to thrive and thus, drive forward a long-term and ultimately sustainable innovation economic vision?

 

 

Secondly, what role if any can innovative Foreign Invested Enterprises (“FIEs”) play in this transition and does the business environment allow for success in the market?

 

 

This article will examine the key drivers towards how China can successfully develop its creative economy and transform it into that of an innovative world leading one, to match its GDP and global economic strength, while also showcasing the key areas of opportunity for FIEs.

 

 

Part I: Building a Platform for Success

Why Evolve?

China’s previous growth model which was tremendously successful is starting to decline due to a weakening demand for exports particularly in the US and Europe, overcapacity and high-levels of pollution. Faced with these key challenges, China has embaked on a journey of economic reform directly linked to innovation policies as the stimulant for sustainable economic growth. The 13th Five Year Plan through its 5 Key Tenets of ‘Innovation’, ‘Coordination’, ‘Green Growth’, ‘Opening Up’ and ‘Inclusive Development’ has laid the blueprint for delivering this new economic vision.

 

 

China’s Current Global Innovation Index Ranking

Currently, according to The Global Innovation Index (16th September, 2016), China while having consolidated its position as the 2nd largest economy in the world ranks 29th in the world behind Slovenia, Malta, Estonia and the Czech Republic. China does not rank amongst the Top 3 Innovation performers in South East Asia (which are ranked in order; Singapore, Hong Kong and the Republic of Korea).

 

 

Fig 1 - Global Innovation Index (Sept 2015) Innovation Quality (Source: The Economist)

 

 

Fig 2: Global Innovation Index, (Sept 2015) Middle Income Countries (Source: The Economist)

 

 

Ranking is based on 3 key criteria: Average rating of top three universities, Number of patents filed per unit of GDP, Cited articles as % of published articles.

 

 

In the ‘Innovation Quality’ category, while China leads the ‘Middle Income Innovation Quality’ category by some distance ahead of Brazil and India taking into account the average ranking of the Top 3 universities, number of patents filed per unit of GDP and cited articles as percentage of published articles, China still ranks far behind ‘High Income Nations’ (Ranked in order: USA, UK and Japan). In a perfectly geared innovative world, China according to the research conducted within The Global Innovation Index would be a global pillar of Human Capital and Research due to the excellent performance of pupils in literary and numeracy skills. The findings of The Global Innovation Index report conclude that in order to successful enact the transition to a creative and innovative economy; China is progressing forward to achieve its undoubted potential.

 

 

Creative Industries in China: The Opportunities

Creative sector industries can be defined as per the visual below. China possesses a rich culture to act as the creative economy catalyst and has significant potential for growth across these highlighted areas, therefore illustrating the great economic benefit that development of a creative economy can hold as China embraces further economic reform.

 

 

The Key Elements for Building a Prosperous & Sustainable Creative Sector

Navigating the transition from a manufacturing economy to a knowledge economy is the key goal of China’s economic shift however development of a prosperous and sustainable creative sector driven by world-class innovation and entrepreneurship is a fundamental component of this process.

 

 

The Oxford dictionary defines creativity as “The use of imagination or original ideas to create something; inventiveness. Bringing into existence! Giving rise to, being imaginative and creative.”

 

 

Creativity is the essence of effective business, whether through creative product and service innovation or generation of creative solutions around a negotiation table. All industry sectors and industries require creativity and innovation at some stage.

 

 

The following elements are the key areas that constitute a prosperous and sustainable creative sector:

  • Education
  • Culture
  • Representation
  • Sector Diversity
  • International Mind-set

 

 

Education

From grass-roots education to professional practice in the real world, education forms the backbone for the evolution of a creative sector. Creativity and kinaesthetic activities should stand on equal footing with literacy and arithmetic in order to drive forward the creation of innovative thinking within China’s creative leaders and innovators of tomorrow. Successful creative economies such as the UK and US have achieved a balance between these three key areas. China’s education system is largely traditionalist, however the education sector is seeing patterns of reform and an increase in demand for extra-curricular creative activities and it will be of interest to view how government policy on education evolves.

 

 

Culture

Culture is the heartbeat of a creative and innovative society and this is an area that holds great potential for China. With a rich history and culture, the opportunities for China to showcase it are immense. Creation of Creative Industry Clusters in Beijing such as 798, Shangdi, Tech Parks such as the Zhongguancun Science & Technology Park and events such as Beijing Design Week are vehicles to leverage creativity and innovation as forces of economic growth.

 

 

Representation

A sustainable creative sector in order to thrive requires strong representation and networks through government vehicles both internally and externally.

 

 

Sector Diversity

Sector Diversity is brought about through creation of a multidisciplinary diverse creative industries sector that promotes cross-fertilisation of people across a wide range of expertise and skill areas as illustrated in the table below.

 

 

International Mind-set

The 2008 Olympics and 2010 World Expo in Shanghai created a two way transformation of perceptions as to how China viewed the West but perhaps more significantly, how the Western World viewed China. These key events also significantly enacted a mind-set shift throughout Chinese society. As Chinese enterprise continues to expand and diversify its reach into new markets and industries and developing new innovative technologies to export, an international mind-set has become an increasingly important characteristic for creative talent. Alibaba’s successful brand expansion into new creative industries and international growth can in part be attributed to Jack Ma’s ability to communicate and engage with the international business community, exuding that precious creative commodity of soft power.

 

 

Can China’s IP Protection Environment Incubate Creativity?

IP is a common buzzword but it is an idea that is the result of a creative process that when registered, transforms into an asset that can be exual Property protection environment can be argued as having obstructed the growth of domestic innovation which has an impact on both Chinese and Foreign Invested Enterprises. With China’s focus shifting towards innovative economic drivers, both Foreign and Chinese firms will require stronger protection of their IP. The signs are encouraging however. There is greater flow of IP in China both from domestic and from foreign invested enterprises than ever before.

 

 

Fig 3 below shows the rapid rise in the filing of utility, design and invention patents between; 2002 – 2012

 

 

Patents Issued by China, 2002-2012

In 2015, 1.1 million patent applications were filed, up 18.7 percent year on year, according to figures from the State Intellectual Property Office (SIPO). About 359,000 invention patents were authorized, 263,000 of which were granted to domestic applicants, 100,000 more than in 2014. SIPO figures also indicate that in 2015, 60.5% of invention patents went to Chinese enterprises, demonstrating a 4.1% increase. With Innovation being one of the 5 key tenets of the 13th Five Year Plan, authorities have rolled out favourable policies to support high-tech companies and encourage investment into research and development, which to date have been successful.

 

 

Part II: Opportunities for Foreign Invested Enterprises in China’s Creative Economy

The development of the Creative Economy as a powerful economic driver has opened up a number of opportunities for FIEs across a number of sectors. The below section highlights these potential growth areas:

 

 

Music, Film & TV

Since the Chinese State Council took the decision to open up commercialisation of the creative sector in 2009, particular focus has been made on the film and television industry, publishing and distribution, printing, advertising, entertainment, cultural exhibitions and digital content. Since the promulgation of the “Cultural Industry Revitalisation Plan” in 2009, China has sought to exercise controlled growth specifically concerning the television industry whereby restrictions have been placed on the export of TV programmes and formats in order to ensure that Chinese broadcasters remain competitive. With the new economic policy direction of China through the 13th Five Year Plan, Made in China 2025 and Internet Plus, funding has been allocated to developing key innovation sectors including entertainment, live music, animation and digital games, TV, film production and distribution, publishing, cultural exhibitions and internet media. Education institutions have established research centres and regional governments have set up city specific plans for developing the creative economy.

 

 

Fashion Design & Retail

China’s growing middle income consumer demographic has created a demand for global fashion brands to continue retail expansion into China. Alongside this, boutique ateliers and independent designers also have an opportunity to export product and sell to a thriving new market. With the changing lifestyles and habits of China’s ‘Middle Income Consumers’ transitioning from being traditionally brand led to quality led, a different approach is needed in order to successfully achieve market penetration. According to a recent study by McKinsey, China’s Middle Income Consumer demographic has seen their disposable income rise to between GBP 6,000 to GBP 23,000 per year in 2015, making this segment an important consideration for FIEs in this sector. In addition, the much-discussed '80后' (post-1980s) demographic in China consists of the 240 million people born between 1980 and 1990. With unprecedented access to technology, consumer goods and social media, understanding what drives their buying decisions is also of great importance. Chinese companies have yet to successfully enter the premium market and foreign companies still dominate the skincare, premium car, sports apparel and fashion sectors, illustrating that FIEs maintain a very competitive proposition for China.

 

 

E-Commerce & M-Commerce

It has been estimated that by 2018, China will surpass the United States as the largest market for cross border e-commerce. Approximately 88.9% of Chinese users access the Internet from smartphones. With the growing use of internet and smartphone technology to make purchases, companies should look towards strategically leveraging the largest e-commerce market in the world. It has been predicted that China’s e-commerce market will reach GBP 3 Trillion by 2020. This is larger than that of the US, UK, Japan, Germany and France combined. This is not restricted to 1st tier cities. Tier 2 cities according to a Jan 2016 survey by The Economist Corporate Network and Admaster have overtaken Tier 1 cities in terms of purchases made on mobile devices. Member companies in the retail sector particularly should pay close attention to leveraging a localized and optimised website, social media, CRM tools and digital advertising to engage the market. Foreign brand-based companies should either focus on developing their own sites to increase traffic or establish relationships with Chinese e-commerce platforms such as JD, Taobao and T-Mall.

 

 

Professional Services (Legal, Financial, Marketing & PR Agency Services)

The Professional Services sector is extremely diverse and carries substantial opportunity for FIEs to prosper within China’s creative economic boom. The demand for financial and legal services will remain buoyant in light of the growing need for protection of IP and patents, which form the backbone of a sustainable creative economy. Aligned with this, we have seen growing M&A activity in the sector as China continues to reach outbound and diversify its investment portfolio into successful global creative sector enterprises. This facilitates the need for financial consulting and accountancy services in tandem with legal services. As Chinese companies continue to expand overseas and integrate more with the wider global economy, effective communications, PR and brand management, as well as the necessary soft skills, will only grow. FIEs therefore operating in this area of professional consultancy services are therefore strongly positioned to enable Chinese businesses to innovate and grow beyond borders.

 

 

Architecture

With the population ratio of Chinese living in cities expected to hit 60% by 2020, development of infrastructure will remain firmly on the government’s agenda. Coupled with this, the 13th Five Year Plan directive of ‘Green Growth’ will ensure that foreign architects and consultancy firms will remain competitive, especially concerning Smart City and Sponge City initiatives. In February 2016, the State Council released a new set of directives focused on the promotion of environmentally friendly urbanization. This will create opportunities for foreign architects and urban planners to export experience and best practice for utilization of green space, creation of mixed use developments, preservation of historical buildings and energy efficient initiatives. Beijing will also host the 2022 Winter Olympic Games, thus maintaining market opportunity for foreign invested architecture firms with a world class pedigree and track record in sports facility and related infrastructure developments.

 

 

Cultural Arts, Leisure & Entertainment

The emergency of a thriving creative industry in China has led to a boom in the cultural arts driven by growing scale of economy and professionalism. The role of foreign enterprises to play in this area is particularly strong commercially and politically with plenty of political capital to be gained through ‘soft power swaps’. The export of cultural initiatives such as museum exhibitions, performing arts and literature, Film & TV and sport remain powerful opportunities for foreign invested enterprises to leverage in tandem with the opportunity to not only succeed commercially, but significantly also build cultural bridges with China.

 

 

Computer Science Technologies

Made in China 2025 and Internet Plus will integrate both industry and Information Technology to form an Industrial Internet. This will open up further opportunities for FIEs in the creative economy for export of automation software in manufacturing and construction. IOT evolution in the Internet Economy will lead to demand for big data and digital marketing services, cloud computing, shared economy and a number of online consumer services. 

 

 

The growth potential of the ‘Industrial Internet’ through linking manufacturing with IOT technologies is strong. In order to make this possible, the Government will be launching fiscal and tax policies to help these industries grow and therefore enabling a sustainable environment for both domestic and foreign invested FIEs to evolve within the Internet Economy.

 

 

In terms of leisure services, digital publishing, internet gaming, software and mobile application development also remain strong opportunities for FIEs focusing on partnership through the creative economy.

 

 

Summary

Looking ahead, these are exciting times for the Chinese Creative Sector and for the foreseeable future FIEs still have in important role to play in the development of the creative economy across a variety of sectors as outlined. In order to move further up the creativity value chain and enable construction of a sustainable creative economy, China is seeking creative partners from abroad through which to deliver upon its need to innovate while at the same time building up its own competencies domestically.

 

 

As the 2nd largest economy in the world, with a final ranking of 29th in the 2015 Global Innovation Index, there is therefore substantial potential for continued growth in the creative sector and for FIEs to add value.

 

 

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Kiran Patel has been living in China since 2004 and is currently the Marketing & Communications Director of LehmanBrown International Accountants, a China focused accounting, taxation and business advisory firm. He is also an elected Executive Committee Board member of the British Chamber of Commerce in China.

China’s rebalancing spells changes...

China’s rebalancing spells changes for African trade.

The impact of structural reforms in China coupled with the fall in commodity prices are now being felt in global markets, especially so in resource-rich African economies. Sub-Saharan African economies in particular have been overly reliant on Chinese resource demand for their economic performance. Over the past 15 years, China has become Africa’s largest trading partner and an interdependence or “growth coupling” has become very evident.

 

 

This slowing demand can be seen over the last two years in terms of the value of African commodity exports, amplified by the fall in global commodity prices. In the first quarter of 2015, the value of crude oil imports from Africa was 50% less than it was in Q1 of 2014. In addition, iron ore imports contracted 55% in value terms, while copper imports from the continent slid 39%.

 

 

Nonetheless, China continues to be a key driver of global economic growth, and the recalibrations in its economic makeup will certainly test the resilience of its economy, as well as redefine the commercial relationship and terms of engagement of this Asian giant with key commercial and trading partners, including the African continent.

 

 

Which African countries will be impacted the hardest?

In 2015, almost 80% of China’s crude oil imports from Africa came from Angola, Republic of Congo, Sudan and South Sudan – with Angolan exports making up 61%. Crude oil exports from Equatorial Guinea and Nigeria account for 5% and 3% respectively.

 

 

In iron ore, 95% of Chinese imports from Africa came from three countries – South Africa (62%), Sierra Leone (21%) and Mauritania (12%). Around 73% of South Africa’s total global iron ore exports were absorbed by China, illustrating the country’s exposure to a Chinese slowdown.

 

 

And in copper, 87% of Chinese imports from Africa originated from Zambia and the Democratic Republic of Congo (DRC), with a further 7% from South Africa. Roughly 40% of Zambia’s total copper exports were absorbed by China, 42% for the DRC, and near 60% for South Africa.

 

 

Despite slowing growth, the Chinese government and private companies will continue their long-term strategic geopolitical relationships and investments across the continent. China is invested in African nations for the long term especially in relation to infrasturcture construction.

 

 

Whilst a sizable funding commitment was announced at the sixth Forum on China-Africa Cooperation (FOCAC) to create a US$10bn China-Africa industrial capacity cooperation fund to support investments into value-adding sectors including manufacturing, hi-tech, agriculture, energy and infrastructure by Chinese firms in Africa. It is evident that African nations must rebalance their economies as China dose and a new growth model must be found in the near term. African businesses will need to refocus their value proposition for doing business given China’s own internal recalibration.

 

 

Chinese FDI in Europe at record levels

Chinese FDI in Europe at record levels

Chinese investment in Europe is now at a record high despite a sense of continuing economic crisis in both China and the EU. Last year, Chinese takeovers in the EU-28 reached a record volume of approximately €20 billion, equivalent to an increase of 44 per cent compared to 2014. China has now become one of the main drivers behind global capital flows, growing into one of the three biggest foreign investors in the world. This development has increased the competition for Chinese investment among EU states and could weaken the European Union’s negotiating power with the PRC regarding strategic issues. Forecasts see the next five years as continuing this trend.

 

 

Europe has become one of the main destinations for outbound FDI as Chinese investors have increasingly moved away from developing and emerging economies, focusing on high-income industrial nations instead. The enormous rise in Chinese investment in Europe – 44 per cent more than in the previous year – is largely due to Italian tyre maker Pirelli being taken over by ChemChina (for €7 billion). On average, China has invested €10 billion a year in Europe over the last five years. In the five years prior to this period, it was ‘only’ a billion euros per annum. This underlines the fact that Europe is not just experiencing a temporary trend here. However, while Chinese FDI has been growing, the level of European investment in China has actually been stagnating – or even dropping. Ultimately, this situation is likely to create a considerable imbalance: making it all the more pressing to do away with one-sided investment barriers. This could be achieved by means of the Bilateral Investment Agreement, which China and the EU have been negotiating for the last two years

 

 

Downward pressure in the Chinese economy is boosting FDI

Restructuring the Chinese economy at a time when growth is dwindling is having a direct effect on sectors that are of interest to Chinese investors. Looking at the foreign investments made last year, a considerable mixture of sectorss is apparent, ranging from technology and advanced services to brands and consumer goods. The largest proportion of investments seen in 2015 was made in the automotive sector, followed by real estate, hospitality, information and communication technology, and financial services. What is noticeable here is that Chinese investments are particularly increasing in areas that are not freely accessible to foreign investors in the PRC, such as the finance sector. This ought to strengthen the resolve of the EU’s member states to demand equal conditions for access to China’s markets

 

 

The majority of Chinese investment in Europe was undertaken in Britain, France and Germany. Over the last five years, the figure has amounted to an average of four to eight billion euros a year in these countries. In the last two years, however, certain countries in Southern and Eastern Europe have started to catch up, just like the Benelux countries have. This development has fuelled diplomatic efforts to promote high-level exchanges with China to boost flows of capital. The same thing applies to the ‘16+1’ format that links China with Central and Eastern European countries. The race for Chinese investment has been increasing the amount of friction felt within Europe on key policy issues such as the pending decision as to whether China should be entitled to the status of a market economy from the end of 2016 or whether the EU should negotiate a free-trade agreement with the PRC. 

 

 

Of all the member states in the European Union, Germany is the one that has seen the steadiest inflow of Chinese capital over the last five years. In 2015, the overall amount came to €1.2 billion, dropping slightly from €1.4 billion in 2014. Despite this slight dip, Germany does not seem to have lost any of its attraction to Chinese investors over the years. The automotive industry and machinery/plant engineering alone attracted 400 million euros’ worth of Chinese FDI last year. The biggest deals of all included the acquisition of two automotive suppliers, WEGU Holding and Quin, and Weichai’s second increase of its stake in KION, a producer of forklift trucks and warehouse technology. In fact, Germany seems to be growing increasingly attractive to financial investors from China. In 2015, the sovereign wealth fund China Investment Corporation (CIC) acquired a share in Germany’s largest motorway service station operator, Tank & Rast, and the Fosun Group invested in KTG Agrar. Three record investment projects concerning KraussMaffei, the mechanical engineering firm, the private bank Hauck & Aufhaeuser and environmental engineering company EEW Energy from Waste are currently being finalised. Hanemann and Huotari expect Germany will also benefit from this wave of Chinese investment in the future, particularly in view of the support provided by the Chinese Government and the creation of more financing vehicles such as the new ‘Industry 4.0’ fund.

 

 

The Chinese leadership has strengthened its capital flow controls because of the considerable amount of turbulence felt on the country’s stock markets and financial markets in a bid to stem the enormous outflow of capital. Some of these controls could also apply to Chinese companies that wish to make investments abroad. At the same time, however, the pressure is rising for Chinese businesses to internationalise. If Premier Li Keqiang’s announcement proves to be true that China is going to invest $1 trillion of OFDI globally over the next five years, then it would make China the second-largest exporter of FDI in the world, only one step behind the United States. The Chinese leadership has a knack of making foreign investments by Chinese companies look as if they are of mutual benefit; promises of Chinese investment and flows of capital have long been vehicles of Chinese foreign policy.

 

Pictorial: Chinese Street Food, Chuan`r...

Pictorial: Chinese Street Food, Chuan`r 串儿

The Variety and depth of Chinese street food is incredible, however for this pictorial we have chosen one of our favorites: Chuan`r 串。

All Images © Patricia Calvo

 

 

 

 

 

 

 

 

 

 

 

 

The Globalization of Chinese banking

The Globalization of Chinese banking

With increasing integration into the global economy. There is good reason to believe that the Chinese economy has reached a point where its status as the biggest export country will also soon become the biggest in outbound direct investment.

 

 

This new model requires not only Chinese enterprises to expand their global businesses, but also China's banking sector to accelerate its internationalisation. One particularly striking feature of the multipolar world over the past decade has been the rapid appearance of emerging market multinationals, in particular from the BRICS. These multinationals benefited from globalisation, and, in turn, have played increasingly significant roles in driving globalisation.

 

 

Global business and its conventions have changed in many ways, capital flows are no longer one way - from developed nations to the developing economies. Now both have become capital exporters. In contrast to the weakening of consumption in advanced countries, there is huge from new consumers emerging in developing markets.

 

 

As part of its ‘Go Abroad’ policy the Chinese renminbi has become the second most widely used currency in trade and finance, and ranked fourth in payments, sixth in international inter-bank loans as well as new bond issues, seventh in foreign exchange transactions and eighth in terms of outstanding international bonds. These figures show the main driving force for Chinese banks to follow their customers abroad.

 

 

Meanwhile, with the renminbi's ongoing internationalisation, there have been a new choices for Chinese firms and banks to freely choose their settlement and investment currency, making it easier for them to lower the cost of finance and conversion by raising funds from different onshore and offshore renminbi markets. And so it is unimaginable that the renminbi can become a global reserve currency without support from Chinese international banks.

 

 

Admittedly, Chinese financial service providers lag well behind other enterprises going abroad. There is room for further improvement in providing enterprises with more cross-border products and services.

 

 

Historically, the years before the global financial crisis saw a rapid growth in the cross-border activities of banks. According to the Bank for International Settlements, the average year-on-year growth rate for cross-border bank credit to non-banks from 2000 to 2007 was 15.2 percent. European banks were in the vanguard, with around one-third of their assets outside their home markets. However with the homeward migration of European banks opportunities have opened up.

 

 

Whilst Chinese banks may be facing slowing growth in profitability in the domestic market as financial reforms and the slowing economic growth begin to bite. To some extent, developing their international business can help them diversify income streams and disperse risks.

 

 

Choosing regions of growth is vital to the success of banks' internationalisation. With Chinese trade and investment with the rest of the world becoming increasingly diverse, Chinese banks must further expand their global network so that they can have a larger coverage of overseas businesses: banks are giving greater importance to delivering financial services in Asia, Africa, the Middle East and Latin America. Organic growth within the chosen region will be a fundamental way of developing Chinese global banks, though it may take time to achieve this goal.

 

 

In the early stage of internationalisation, Chinese banks are placing a strong emphasis on corporate banking and cross-border services, rather than retail banking. There is a huge potential in corporate banking in growth areas such as international settlement and cross-border payment, which bring fee-based income. Trade finance, cross-border cash pool management and bank loans have all played important roles in facilitating world trade, investment, manufacture and innovation.

 

 

Risk management capabilities are vital for any bank's survival during its journey to internationalisation. Since global businesses may encounter more challenges than domestic ones, Chinese banks need to revitalise their risk management processes in order to ensure that their capital, liquidity, credit and national risks are all controlled at a level aligned with the bank's global strategy.

 

 

While the Chinese Big Five banks are now on the list of the World Top 10 Banks by market capitalisation, there is still a long way to go to make them truly international. Whilst Chinese banks will continue to pair with Chinese business expanding overseas this will naturally lead to the globalisation of the RMB and an increase of RMB reserves held by foreign nations.

 

 

A Tale of Two Economies

A Tale of Two Economies

By Andy Mok for China Brain.

 

For China’s economy, 2016 is both the best of times and the worst of times. To carry on with the Dickensian analogy, many in China bask in a balmy spring of hope while others endure a punishing winter of despair.

 

 

At the national level, as the table below shows, China is doing well compared to its peers. While the size of China’s economy is comparable to those of the developed countries, its growth rate remains a multiple of theirs. Also, because China’s GDP methodology relies on direct reporting by large enterprises but only a sampling of SMEs, the smaller (and fastest growing ones) are likely to be under-represented. As such, actual GDP growth is higher than reported.

 

 

Meanwhile, despite India’s growth rate being comparable to that of China’s, it lags far behind in both nominal and per capita GDP terms with the kind of political and other structural impediments that make it unlikely to close this gap in the near term.

 

 

More importantly, the rebalancing of China’s economy is well underway with services recording a real increase of 8%, which is above overall GDP growth, and now accounting for 50% of total output. Solid retail sales growth of 10.6% also points to the growing importance of consumption and positive long-term changes in the composition of GDP. 

 

 

  China Euro Area US Japan India
Population (million) 1,375 338 322 127 1,254
GDP, nominal ($ billion) 10,355 13,410 17,419 4,601 2,067
GDP YoY 6.7% 1.6% 2.0% 0.7% 7.3%
Inflation rate 2.3% 0.0% 0.9% 0.3% 4.8%
Unemployment rate 4.1% 10.3% 5.0% 3.3% 4.9%

 

This is all well and good from a macro perspective. But the headline GDP figure also masks both the strength and optimism in China’s new economy while also perhaps understating the severity of the structural challenges facing China’s old economy. Jim McGregor, author of One Billion Customers, has referred to China as both the world’s biggest startup and the world’s biggest turnaround. The startup is booming while the turnaround is struggling.

 

 

The new economy is led by the post 90s generation: Brash and optimistic, well-educated, service-based and mostly centered on the coastal cities of China. Meanwhile, the old economy is traditional and conservative, older, blue collar and manufacturing-oriented, slower to adapt to new global realities and mostly based in the Tier 2+ industrial cities of Northeastern and Northwestern China.

 

 

As shown in the table below, the economic disparities are striking (and, absent government intervention), likely to grow even larger.

 

 

  Beijing China Shanxi Gansu
Population (million) 21.56 1,375 36.48 25.91
GDP, nominal ($ billion) $369.60 $10,355.00 $205.60 $109.06
GDP per capita, USD $17,143 $7,925 $5,636 $4,209
GDP per capita vs Beijing 1.00 0.46 0.33 0.25

 

The new economy is firing on all cylinders. Investment capital is abundant with traditional VC funds like GGV having recently raised $1B+ new funds while corporate titans like BAT (Baidu, Alibaba, Tencent) continue to invest ever larger sums in startups and acquisitions both inside and outside of China to bolster their competitive positions. According to a recently released survey by SPD Silicon Valley Bank 85% of Chinese startups surveyed expect business conditions in 2016 to be better than that of last year, which was higher than the 64 percent in the US and 58 percent in the UK.

 

 

The explosion in e-commerce is one cause for this optimism. According to eMarketer, China’s shoppers spent $672 billion online in 2015 with $1.21 trillion forecast for 2017. While growth rates are anticipated to fall from 42% in 2015 to 30% in 2018, the opportunities are enormous in both absolute GMV (gross merchandise value) and percentage growth terms. It’s also worth mentioning that online sales in China accounted for 16% of all retail sales in 2015 and are expected to rise to 30% in 2018.

 

 

The further mainstream adoption and globalization of augmented reality/virtual reality, drones and robotics will also bring rapid and large benefits to Chinese entrepreneurs and their investors, both domestic and foreign.

 

 

Inland, things are bleak. Not only are key economic indicators generally below national averages, but former pillar industries undergirding the proletarian ideal such as steel, cement and mining are in secular decline. Furthermore, because both labor and capital goods are not as fully fungible as microeconomic theory describes, systemic redeployment of these factors of production is doubtful.

 

 

The good news is that the central government has both the financial and intellectual horsepower to address these problems. Besides one-time ex gratia payments to laid off workers, it would not be surprising to see cutting edge policy responses such as an unconditional basic income as part of an integrated set of policy responses to ameliorate the structural dichotomy between China’s new and old economies.

 

 

So, while China’s two economies face very different prospects, the country is governed and united by a strong single-party system that has the will and capacity to address the challenges of the old economy. While past performance doesn’t predict future performance, that is certainly the way to bet. Given the success of China’s leadership in navigating past development crises, perhaps this is just one more victory on the road to the rejuvenation of the Chinese nation.

 

---------------------------------------------

 

Andy Mok currently runs Red Pagoda Resources, a Beijing-based professional services firm that helps startups in China secure money, key talent and media attention to accelerate their growth and success. He holds an MBA from the Wharton School and an MA in China Studies from the Johns Hopkins School for Advanced International Studies. His research is currently focused on One Belt One Road-related investment opportunities.
 

China`s land connectivity: thinking...

China`s land connectivity: thinking big

Focused on spreading growth and development to China’s less-developed areas by linking north-western and north-eastern Chinese regions to Central Europe, South and West Asian countries, China`s 21st Century Silk Road Economic belt is gaining traction.

 

 

Volumes of container cargo travelling between China and Europe by rail are growing as operators increase frequencies and state organisations along the route lend their weight to the development of new services. Two-way services from Asia’s largest railway hub in the city of Chengdu (China home to more than 260 Fortune 500 companies) in southwest China’s Sichuan province to Lodz in Poland have been increased from twice weekly to five times per week. The overland route appeals in particular to electronics and automotive industry manufacturers because the value lost on goods such as computer components and engines during the longer sea journey is relatively high.

 

 

The Chengdu-Europe Express Railway Service, which started in April 2013, carries IT products, automobile parts, and clothes from China to Europe, and food and beverages in the other direction. German-owned DHL offers temperature-controlled container services on the route.

 

 

Other landbridge services are also expanding. Trans Eurasia Logistics (TEL), a joint venture between Germany’s national rail company, Deutsche Bahn, and Russian Railways, launched a new regular weekly service between Wuhan in central China’s Hubei province and Hamburg earlier this year.

 

 

TEL operates one of the largest and most famous landbridge services between China and Europe. The ‘Yuxinou’ service is an 800 m-long container train that travels between Chongqing in southwestern China and the German port city of Duisburg three times a week and five times in peak season.

 

 

Rail services to Europe are now also offered at several other Chinese cities, including Zhengzhou and Changsha in central China, and Shenyang and Harbin in the northeast.

 

 

As the world’s top exporting nation, China has an interest in simplifying its transport access to Europe, its leading market. Diversification away from sea transport through the creation of more land-based routes, especially high-speed train links is reducing average transport times by several working days. Initial activities have be geared towards building basic infrastructure, a sector where China is well-equipped to provide engineering skills, construction experience, machinery and equipment as well as materials such as cement and steel in which it has excess capacity. EU-China trade is likely to get an important boost from the expected reduction in transport time and costs while EU exporters and investors will gain access to new growth markets in inland China and Central Asia.

 

 

Environmental & Economic issues are also at the fore where the carbon footprint of rail transport is typically about one-thirtieth that of air freight, whilst delivery times are about half of that required by sea freight.

 

 

Increased EU-China connectivity is increasing bilateral trade, investments and creating new business opportunities for European, Central Asian and Chinese enterprises as well as boosting employment, growth and development.

 

 

Chinese growth trends to note

Chinese growth trends to note

139.2 million outbound tourists, Chinas hottest export

 

 

Consumer demand is growing so fast that China just can’t contain it. Burgeoning consumer demand and an increasingly globally minded populace saw China became the largest global source of outbound tourists in 2015. 120 million Chinese travelled out of China last year, spending a whopping $229 billion overseas and charting a 19.5% increase y-o-y on the 109 million outbound tourists in 2014.

 

 

This growth is set to continue growing. Total tourists and spending are estimated to grow 16% and 21% y-o-y respectively in 2016 & 2017, which basically adds up to another year of 139.2 million projected outbound Chinese travelers!

 

 

The spending power of China’s internationally mobile HNWIs, business travelers, and middle-class is having such an impact on travel markets that it’s dominating business class air travel. The Global Business Travel Association Foundation estimates that business class spending by Chinese travelers will increase to $322 billion in 2016 and rise to $420 billion by 2019, overtaking the US market as the largest source of business travel bookings.

 

 

 

China’s silver screens worth US$8.2 billion in 2016

 

 

Western film companies are increasingly eager to cash in on China’s movie market and, let’s face it, they have 8.2 billion reasons to do so – that’s the amount of revenue (in US dollars) that Citigroup research expects will be spent in mainland box offices in 2016.

 

 

That 28% y-o-y increase means China is closing in on the US – the world’s largest film market, which is expected to see approximately US$11 billion of box office revenue in 2016.

 

    

 

With this huge potential market in mind, Western movie companies have been offering more parts to Chinese actors and actresses, and featuring mainland locations prominently in their latest releases. However Chinese companies are also funneling investment into film studios, with firms such as Dalian Wanda and Hony Capital particularly active. Dalian Wanda, helmed by China’s richest man Wang Jianlin, has recently acquired a major stake in Legendary Entertainment, the studio company that brought us Jurassic World, The Dark Knight, and the Hangover.

 

 

Overseas education remains a key driver for investor demand

 

 

China looks set to retain its place as the world’s largest source of international students. Competition for top-end positions in China is as fierce as ever, and the allure of a Western education abroad remains strong. An estimated 460,000 mainlanders studied overseas in 2014 alone, up 11% y-o-y compared with 2013.

 

 

The Chinese student market is so important that it is being regarded as ‘priority number one’ by Times Higher Education Rankings, with universities bending over backwards to market their courses in China and expand the range of courses on offer to Chinese students. As such, many governments, including the UK, US, Canada, and South Korea, have moved mountains to make visa processing simpler and more accessible for the thousands of potential Chinese students looking overseas.

 

 

With policies such as these, and a strong demand outlook, extra support is being provided to property investment demand, since Chinese parents often prefer setting their children up with their own homes while studying abroad. 

 

 

Financial sector reforms will open up capital floodgates

 

 

As more Chinese companies and citizens look outwards for business and investment opportunities, China’s financial system will be moving to adapt to meet their needs. Further reforms to open up China’s financial system to the outside world are expected in 2016.

 

 

Measures such as expanding the Hong Kong-Shanghai Stock Connect, permitting non-residents to issue financial products on domestic markets, and giving foreign investors easier access to China’s capital markets will all feature prominently, as Chinese authorities look to promote full convertibility of the RMB with foreign currencies within the next five year plan.

 

 

Simply put, removing controls on capital outflows and allowing investors to move their money in and out of China whenever, wherever they want.

 

 

Outbound property investment to soar 50% y-o-y

 

 

Chinese companies are slated to ramp up their overseas investments over the next 12 months, and total investment will likely exceed the US$104 billion recorded up to the end of November 2015.

 

 

2015 has seen a marked policy shift, with numerous measures implemented, such as an expansion of QDII quotas and other changes to free the wheels of outbound investment, and this is only going to expand under the newly-announced 13th Five Year Plan. Coupled with the financial sector reforms, plus increasing demand from business and individuals for overseas property investments, it’s likely to be another bumper year of outbound investment.

 

 

Colliers International estimates China’s 2015 total outbound investment in property alone totalled US$29 billion, and will increase by 50% y-o-y in 2016.

 

Chinese investment in key global cities

 

China to be closer than ever, with more routes set to open

 

 

The Chinese diaspora is set to grow. As China’s populace becomes increasingly internationally-minded and dispersed, airline operators are providing more connections.

 

 

Major airlines – including China Airlines, China Southern Airlines, United Airlines, Singapore Airlines, AirAsia, and Hainan Airlines – are setting up new routes to ferry China’s business and leisure travelers to increasingly diverse locations. It’s this trend that has seen air traffic doubling at major airports in China like Shanghai’s Pudong Airport, and also is also witnessing rapid growth at emerging hubs, such as Kunming. An important emerging trend to note is that new routes are not only linking up with major gateways, such as London and New York, but also with second- and third-tier cities in Europe and North America, such as Budapest, Birmingham, and Boston.

 

 

This clearly illustrates Chinese investors’ widening horizons as they become tuned into investment opportunities away from more traditional investment hubs. 

 

 

The beautiful game to boom in China

 

 

Almost by presidential decree, football is about to become big business in China. President Xi Jinping is an avowed football fan, and away from the dry statements about five year plans, top-level initiatives are being drawn up to boost the development of the game in the mainland.

 

 

Government support, plus the prospect of the growth of soccer and the marketing revenue and TV viewers associated with the sport in China, has already sparked huge investments in football clubs:

Alibaba’s Jack Ma famously invested US$192 million in Guangzhou Evergrande, which recently made the finals of the World Club Championship, and major automaker SAIC is about to invest RMB 1.5 billion in Shanghai SIPG Football Club, too.

Football fever is driving Chinese investors overseas too – Dalian Wanda scooped up 20% of Atletico Madrid, whilst China Railway bought a stake in Inter Milan.

 

 

Demographic policy changes to alter real estate demand

 

 

China reached a demographic turning point in 2015, when it became clear that the % share of young people in the population started to drop, while the % of old people started to increase.

 

 

Concerned about a dwindling workforce, the Chinese government released a spate of policies recently, including the stunning abolishment of the one-child policy, as the country promotes a new, more laissez-faire approach to family planning. The acknowledgement of the demographic problem and the roll-back on one of the government’s main policies is a major change in China and one that’s likely to feature at the forefront of investor’s minds, particularly when it comes to property investments.

 

 

Real estate developers like China Vanke have long been targeting China’s growing market of retirees for years, and marketing campaigns are now increasingly playing on the new policy rule on extra children. This turnabout will see more Chinese couples thinking in larger dimensions for living space to support their future families. This shift in mentality, combined with overseas property investment being more accessible than ever, will also likely generate a wave of couples and retirees who will be thinking more seriously about moving overseas, which may expand the range of investible properties buyers’ sights.

 

 

Cyber Insurance in China explained.

Cyber Insurance in China explained.

By Simon Gilbert for China Brain

 

 

The increased frequency and severity of cyber crime in several of Asia's tiger economies has dominated headlines in recent months. Statistics from the International Data Corporatation (IDC) indicate that the impact of cybercrime includes the impact of hundreds of millions of people having their personal information stolen. In 2014, more than 20 million people in China were affected.

 

 

The annual cost to the global economy from cybercrime is more than $400 billion. Notably, cyber crime losses from the four largest economies in the world (US, China, Japan and Germany) reached $200 billion in 2014, according to IDC.

 

 

Whilst the Chinese insurance framework is not as advanced as those in developed markets, it is moving in the right direction and the pace of change is high to adapt to international norms. The challenge for insurers and reinsurers in China is the speed at which the regulatory framework is developing.

 

 

WHY CHINESE BUSINESS NEEDS CYBER INSURANCE

 

 

There are only two types of companies: those that have been hacked and those that will be.  Even that is merging into one category: those that have been hacked and will be again. Cyber attacks are coming thick and fast and becoming almost an inevitability for business.   It is essential that Chinese businesses proactively manage their cyber risks. 

 

 

Chinese businesses in different industries will be feeling particularly vulnerable given the increasing realiance on computer networks and connectivity of data. Recent major cyber attacks in the US and EU serve as a strong reminder as to the importance of regularly reviewing cyber security arrangements.  The directors of a business must ensure they understand the most recent threats and are suitably prepared in the event of an attack.

 

 

CYBER INSURANCE EXPLAINED

 

 

Typically, the cyber insurance industry breaks an event such as TalkTalk into three parts: Event Management, Financial Loss and Liability.

 

 

Event Management involves the internal and external expenses of managing the response to a cyber event.  Cyber insurers vary in the extent of cover provided in Event Management, but in general they recognise that providing access to third party cyber security experts can mitigate the consequences of a catastrophic event. 

 

 

This is sometimes spearheaded by a cyber response coach, an industry expert responsible for advising a business on how to handle and manage a cyber event.  Typically this will start with an investigation by third parties to establish the extent of the issue.  If card data is compromised then insurers can indemnify the costs arising from a specialist Forensic Investigator.  Consultation on how to manage legal and regulatory issues will also be covered as well as a crisis communication strategy.  Establishing a call centre to field queries and providing credit monitoring are the last elements of cover.

 

 

Financial Loss takes into account the increased operational costs and reduction in profits as a result of the attack. This is known as non-physical damage business interruption, and is typically excluded from property insurance. Should any fines and penalties be issued by regulators and industry associations (for the loss of sensitive card payment data), then cyber insurers will cover this with the proviso that these are insurable by law.  Costs in managing a cyber-extortion situation — and the ransom itself — can also be covered.

 

 

Liability tends to impact some months later. Affected individuals or businesses may bring claims or written demands for failing to protect their information.  They may seek compensation for financial losses from hacking, or damages from identity theft. In cases where customers are claiming from multiple jurisdictions, cyber insurers can contribute towards defence costs and any resulting damages from multi-jurisdictional claims. 

 

 

SUMMARY OF A CYBER INSURANCE POLICY:

 

 

Event Management

Financial Loss

Liability

Incident response consultation

Loss of net profits

Privacy defence costs and damages

IT forensics (including PFI costs)

Increased costs of working

Failure to notify defence costs and damages

IT professional services

Reputational loss

Hack or virus defence costs and damages

Legal & regulatory consultation

Regulatory fines & penalties

Defamation defence costs and damages

Notification management

PCI Awards

IP defence costs and damages

Crisis communications

   

 

THE RISK OF GOING UNINSURED
 

 

Elmore research has found many Chinese Businesses are running a great deal of cyber risk on their balance sheets.  By effecting suitable cyber risk management, such as a robust cyber security framework, including penetration testing and effective threat detection through multi-layer monitoring, as well as suitable testing of incident response plans many cyber attacks can be stemmed from an early stage.  An incident response plan, which considers not just business continuity and disaster recovery, but also easy to implement steps and pre-contracted responders, can make the difference between a disastrous impact to reputation and a positive outcome for the entity in question.

 

 

Written by Simon Gilbert, Managing Director, Elmore Insurance Brokers Limited, www.elmorebrokers.com. Elmore Insurance Brokers Limited are a specialist international insurance and reinsurance broker, connecting it`s clients to innovative and competitive capacity.

 

Don`t underestimate China: Government...

Don`t underestimate China: Government support will allow increased market share.

The first days of 2016 showed that China hasn’t escaped its 2015 woes. On January 4, new data showed that manufacturing activity slowed for the tenth consecutive month in December, and the ensuing sell-off in the stock market forced Chinese officials to halt trading mid-day. Global markets sank, and another bout of volatility on January 7 forced Chinese officials had to halt trading once again. But all the recent talk of China’s troubles has obscured the fact that the country’s companies still pose a formidable competitive threat to many Western multinationals.

 

 

The first concern for multinationals is that after a long period of overinvestment, Chinese manufacturers have been slashing prices. Capital investment still makes up a disproportionately large share of Chinese GDP – 44 percent, higher than in Japan (36 percent) or South Korea (38 percent) when those countries were building industrial capacity in the 1970s and early 1990s, respectively. All that investment has created enormous excess capacity in multiple sectors – 94.5 percent of Chinese steel production is produced below cost, for example. That means Western steelmakers will have to weather downward pressure on prices from Chinese firms that are willing to incur losses to move product.

 

 

China’s National Development and Reform Commission estimates that $6.8 trillion worth of projects – equivalent to 70 percent of China’s GDP – are making “highly ineffective” returns. Net profit margins, long lower than in the developed world, currently stand at just 2.5 percent, compared to 9.6 percent in the U.S., 6.4 percent in the U.K., 5.8 percent in Germany, and 5.1 percent in Japan.

 

 

Cheap, readily available capital has helped sustain investment levels and should continue doing so, despite corporations’ thin profit margins. Chinese banks offer favorable financing to state-owned and formerly state-owned enterprises, bankroll unprofitable projects, and roll over non-performing loans rather than force firms into default. Banks fund these subsidies to borrowers by paying depositors very little interest – 1.75 percent in a country growing some 7 percent a year. They also lend a relatively small percentage of their deposits. The loan-to-deposit ratio in China is just 67 percent. Credit Suisse analysts believe Chinese banks will continue rolling over non-performing loans until the loan-to-deposit rate reaches 100 percent, at which point the central bank could simply print money to prop up loans.

 

 

Chinese officials rarely intervene aggressively to reduce excess capacity by forcing state-owned enterprises to slow production or allowing more companies to go bankrupt. Instead, they step in to help them when they run into trouble, because they’re loath to stir up unrest or jeopardize economic growth. “We think that China…is operating a policy of employment maximization at the expense of profit maximization,” Credit Suisse’s equities analysts wrote in their 2016 outlook. Instead, companies have been trying to export their excess production, slashing prices to lure buyers. In December, China’s producer price index fell 5.9 percent from the previous year.

 

 

The competitive threat goes beyond prices, as Chinese companies are increasingly producing high-quality goods. Chinese automakers, for one, are quickly closing the quality gap with the West. (See chart) Domestic companies have learned quickly from foreign partners, many of which were forced to form joint ventures to do business in China. Sometimes, officials require multinationals to develop some technology in China or allow Chinese firms to own or have exclusive license to intellectual property. Not all partnerships are official – or consensual – either. China has very weak enforcement mechanisms for intellectual property rights, despite official pledges to crack down on IP theft.

 

 

Evidence suggests that the quality of Chinese production will keep improving. China has more than doubled spending on research and development from 0.6 percent of GDP 10 years ago to 2 percent. Chinese innovators apply for 45 percent more patents a year than those in the U.S., though fewer applications are successful. China produces 15 times more college graduates a year than it did in the 1990s, and many have the kinds of skills that can be put to good use in the technical, industrial sectors that China has flagged as strategically important. Out of 7.5 million Chinese graduates in 2015 (compared to 3.3 million in the U.S.), 1.3 million received degrees in science and engineering, compared to 500,000 in the U.S.

 

 

In addition, officials have indicated that they will directly subsidize companies in strategic industries. In its most recent five-year plan, the government prioritized creating “national champions” – companies that can become global leaders – in 10 industries, including information technology, robotics, and aerospace equipment. Domestic robotics companies, for example, are expected to take significant market share from foreign firms over the next decade. Such government support will allow companies to rise faster up the value chain and continue taking market share.

 

 

Official policies already give domestic companies preferential treatment in China, including high barriers to entry in certain industries. Google, Twitter, and YouTube are blocked, for example, allowing Baidu, Sina Weibo, and Youku to thrive without foreign rivals. The Ministry of Commerce has also been criticized for antitrust rulings that appear designed to benefit Chinese companies rather than prevent monopolies. Many of its most important firms are quickly catching up to those in the West in terms of quality, and the government has no intention of letting major manufacturers fail or forcing them to make dramatic cuts in production to deal with an excess supply problem. Quite the contrary, officials are doing a great deal to push Chinese firms to global prominence. Investors in vulnerable Western companies shouldn’t discount the idea that they will succeed.

 

Source: Credit Suisse

Pictorial: New China, Harbin Opera House

Pictorial: New China, Harbin Opera House

The Opera House, located in the Northern Chinese city of Harbin and was designed in response to the force and spirit of the northern city’s untamed wilderness and frigid climate. The sinuous opera house is the focal point of the Cultural Island, occupying a building area of approximately 850,000 square feet of the site’s 444 acres total area. It features a grand theater that can host over 1,600 patrons.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: MAD Architects

FOCAC- helping Africa break it`s three...

FOCAC- helping Africa break it`s three development bottlenecks.

The recent Forum on China-Africa Cooperation (FOCAC) in Johannesburg has provided a new direction for cooperation. Ballooning trade figures show the reason: when the forum was first established in 2000, the trade volume between China and Africa stood at 10 billion U.S. dollars. Now China has become the continent's largest trading partner, with the Chinese Ministry of Commerce expecting trade to reach 300 billion dollars at the end of 2015.

 

 

Cooperation with China is helping Africa break it`s three development bottlenecks of poor infrastructure, shortage of technical graduates and inadequate funding, accelerating its industrialization and agricultural modernization. The summit has provided strengthened consensus between the world's largest developing country and the continent with the biggest number of developing and underdeveloped countries.

 

 

Chinese President Xi Jinping announced that his country will roll out 10 major plans to boost cooperation with Africa in the coming three years.

 

 

Covering the areas of industrialization, agricultural modernization, infrastructure, financial services, green development, trade and investment facilitation, poverty reduction, public welfare, public health, people-to-people exchanges, and peace and security.

 

 

To ensure a smooth implementation of the initiatives, Xi announced, China will offer 60 billion U.S. dollars of funding support including: 5 billion dollars of free aid and interest-free loans, 35 billion dollars of preferential loans and export credit on more favorable terms, 5 billion dollars of additional capital for the China-Africa Development Fund and a Special Loan for the Development of African SMEs, and a China-Africa production capacity cooperation fund with the initial capital of 10 billion dollars.

 

 

  • China will establish a number of regional vocational education centers and several capacity-building colleges for Africa, train 200,000 technicians for African countries, and provide the continent with 40,000 training opportunities in China. Furthermore, China will offer African students 2,000 education opportunities with degrees or diplomas and 30,000 government scholarships. Additionally China will also invite 200 African scholars to visit China and train 1,000 media professionals from Africa.

 

  • On poverty reduction, President Xi said China will launch 200 "Happy Life" projects and special programs focusing on women and children and cancel outstanding debts in the form of bilateral governmental zero-interest loans borrowed by the relevant least developed African countries that mature at the end of 2015.

 

  • In order to help Africa accelerate agricultural modernization, China will carry out agricultural development projects in 100 African villages to raise rural living standards, send 30 teams of agricultural experts to Africa, and establish new cooperation mechanisms between Chinese and African agricultural research institutes.

 

  • On security cooperation, Xi announced that China will provide a total of 60 million U.S. dollars in free aid to the African Union (AU) to support the building and operations of the African Standby Force and the African Capacity for the Immediate Response to Crisis Force.

 

The Chinese government has also finalised a deal with the Djibouti to build its first international military base, granting China land rights for ten years. Whilst international critics have have focused on the threat of China’s military expansion in the region. The new base, reflects China’s long-term economic goals in Africa more than its current military objectives: as Chinese economic interests expand in Africa it is likely that their military presence will grow as well.  The base will serve a number of different functions: as a logistics hub for naval operations to support Chinese anti-piracy operations, as a staging point for operations similar to the deployment in South Sudan, and a means for ensuring that Chinese infrastructure investments remain secure.

 

 

It has become increasing apparent that Western FDI models have not been working in large tracts of Africa. South African President Jacob Zuma said at the summit "Western countries had been in Africa for centuries to rob Africa's resources. They should be admitting what they have done. Some (Western countries) are rich because of the resources they took from Africa. They never thought of helping Africa to develop". Still only accounting for less than 4% of the continents FDI, Chinese investment is equally distributed between good and poor governance countries in the Continent. China`s philosophy to “respect each other's choice of development path and not impose our own will on others” must be given an opportunity to work.

 

 

However this is not pure philanthropy. China is using African infrastructure projects to keep its construction industry busy: which has emerged over the years as one China’s most important exports. Constituting roughly one quarter of China’s $10 trillion economy it is slowing alarmingly on the domestic front. Chinese companies have achieved unprecedented penetration of the African construction sector and this trend now shows no signs of slowing. Infrastructure construction in Africa has now become an end in itself.

 

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