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A New Great Game.

A New Great Game.

Pakistan’s Prime Minister Nawaz Sharif praised Xi Jinping Thursday at the 2014 Boao forum for his “visionary concept” of the New Silk Road, revitalizing discussion on the topic. In a session titled ‘Reviving the Silk Road – A dialogue with Asian Leaders’ he stated that the increased trade and economic relations will bring prosperity to the region.

 

In the modern world, it’s access to markets and communications links that define the development of a country. China, realizing the importance of infrastructure, combined with its need for growth, embarked on an epic building boom in the early 21st century. The importance of having comprehensive road, rail, mass transit and port networks cannot be underestimated. The utilization of such has allowed the Chinese economy to prosper and grow.

 

 

Looking at the next stage of its development trajectory, it has identified Central Asia as playing a key role in its development along the New Silk Road: it was no coincidence one of President Xi Jinping’s first trips abroad was to the region, securing energy deals and pledges of increased security and economic cooperation. China is already the largest trading partner of four out of the five former Soviet Republics (the exception being Uzbekistan), and a main source of foreign investment. Trade between the region and China stands at around USD 46 billion and is set to expand.

 

The Silk Road Economic belt, as described by President Xi, will aim to provide much needed and integrated infrastructure along new road and rail links that are currently under construction. These arteries will carry fiber optic cables and pipelines across the region creating new towns, manufacturing hubs and transportation crossroads. The development of these sectors will help Central Asian countries move away from their dependence on trade in natural resources to more balanced economies based on trade, manufacturing and services.

 

 

This past September, President Xi Jinping embarked on a 10-day tour of Central Asia, leading to a list of agreements signed which will at least double Chinese investment in the region. Existing Chinese investments in Turkmenistan, Kazakhstan and Uzbekistan are estimated at about US$30 billion, while the value of the new contracts will contribute an additional US$51 billion in Chinese investment.

 

Regarding its investment in Central Asia, China has 3 stated aims:

 

Provide a dependable and stable energy supply route, diversifying its energy sources.

Create a means for cost effective transportation of goods and services to Central Asia and finally Europe.

The development of Kashgar in Xinjiang into the transport, services and financial center of Central Asia

 

Other domestic advantages for China would include further securing an export market in this region and preserving stability between its western neighbors.

 

Central Asian Energy resources

 

Central to these plans is a shift in focus from China`s eastern coastal regions to the underdeveloped west and in particular the Xinjiang region where Beijing hopes increased economic development and prosperity will help mollify the grievances of the native Uyghur population.

 

 

Current major Silk Road Economic belt projects under way or under discussions are:

 

The Baku-Tbilisi-Kars (BTK) railway, due for completion this year. The project is designed to facilitate shipping of cargo between Asia and Europe, and will connect the railway networks of Central Asia, the Caucasus and China with those of Azerbaijan and Europe. The BTK railway will have an international impact, expected to transport 1.5 million passengers and 3 million tons of freight per year.

 

Galkynysh Gas field in Turkmenistan. Work has started on the world’s  second largest gas field that will more than double the country’s gas exports to China via the world’s longest pipeline. Due to come online in 2016 with development by CNPC Chuanqing Drilling Engineering Company.

 

Iran-China Natural gas pipeline, via Afghanistan, Tajikistan and Kyrgyzstan, allowing the latter two to reduce their reliance upon Uzbekistan.

 

China National Petroleum Corp (CNPC) paid $5 billion for a share of Kazakhstan’s Kashagan oil field project in September, giving it an approximately 8% stake in the project.

 

This New Silk Road will take careful planning and Realpolitik on Beijing’s part as well as favorable support from its Central Asian neighbors. It has yet to been seen if the economic incentives offered will reinforce political integration amongst historically competitive and volatile nations that feel little allegiance to one another. Security in these nations will play a key as well a China’s desire to preserve stability and security in XinJiang: Uzbekistan’s upcoming elections might provide a clue as to the feasibility of these grand plans and ISAF’s withdrawal from Afghanistan will have the China strategists increasing their efforts to engage with the country. Meanwhile China’s continuing development of the Maritime Silk Road, increasing security for China’s shipping lanes through the Indian Ocean and South China Sea, places it in an increasingly dominant position throughout South Asia, meeting the needs of its population.

 

China`s Investments in Overseas ports

 

Sino-Venezuelan Ties: Strong Despite...

Sino-Venezuelan Ties: Strong Despite Unrest.

"The future of resource cooperation between the two countries is rather optimistic."

 

This statement by Wu Baiyi, a Latin American economic specialist at the Chinese Academy of Social Sciences, is carefully positive about the future of Sino-Venezuelan relations. Based on recent investments and Beijing’s lack of comment on political unrest in Caracas, it seems safe to assume that the relationship is stable and moving forward. Yet, some analysts warn that Beijing may be moving too quickly in a region with an unclear future.

 

 

 In the past several years, Chinese-Venezuelan relations have improved and expanded dramatically as Hugo Chavez and Hu Jintao formed a close working relationship. Following the death of Chavez and the leadership change in Beijing, the two countries appeared to remain close with Venezuelan President Nicolas Maduro visiting Xi Jinping this past fall, followed by a series of deals and investments. The relationship is vital to both sides, with Venezuela relying on China as one of its biggest export markets and Beijing requiring the ties for a stable flow of oil imports. As Beijing avoids interference in what it deems the internal affairs of foreign nations, it is unlikely to let political unrest affect such a significant relationship.

 

China is now Venezuela’s second largest trade partner and Venezuela is China’s biggest investment destination in Latin America. In recent years, there have been several multi-billion-dollar agreements on investments in oil, energy, construction and high-tech industries between the two nations. Additionally, China has provided more than $36 billion in loans to Venezuela since 2008. The vast majority of trade and loans between the two is a result of Venezuela’s massive oil industry. Venezuela is the world’s largest holder of oil reserves, with which it repays most of its debt to China (to the tune of 600,000 barrels per day). As the largest net importer of oil in the world, China requires a highly reliable source. For Venezuela, China provides a refreshingly apolitical export market as a counterbalance to the United States, with which it has not had friendly relations for years.

 

Since coming into power, Nicolas Maduro has made efforts to continue this mutually beneficial relationship. In fact, his ties with China began before even becoming president. During his six years as the Minister of Foreign Affairs under Chávez, Maduro visited China six times. In September, several months after his election, he arrived in Beijing to meet with Xi Jinping and sign several major investment deals (the largest with Sinopec which agreed to a $14 billion dollar development of Venezuela’s Junin oil field). Beijing too has highlighted the importance of Latin America in the foreign affairs of the current president. Xi Jinping’s second foreign trip as President of the People’s Republic was to Latin America, a region with which China’s trade has risen from practically nothing a decade ago to over $250 billion.

 

 

Beginning in February of this year, there have been violent protests in Venezuela’s capital, Caracus, against the government of President Maduro. Allegations against him include human rights abuses, a chronic shortage of basic necessities, high levels of violence (with Caracus listed as one of the most dangerous cities in the world), and poor economic practices leading to severe inflation.

 

 

Unlike most prominent nations and institutions around the globe, Beijing has remained largely neutral on the topic. State run media issued a statement saying, “Venezuela’s government and people have the ability to handle internal affairs, protect national stability and promote social development.” This is consistent with Beijing’s policy of avoiding interference in other nations’ domestic concerns and generally not allowing this to affect their trade relations. Derisively dubbed “dictator diplomacy” by Western nations, this policy has allowed Beijing to maintain ties with “pariah states” and keep politics out of economic policy.

 

 

There have been several major investments made by Chinese companies in the last few months since Maduro’s election. These include the $14 billion investment of the Junin 10 block in the Orinoco Oil Belt mentioned earlier, which was in addition to an earlier $14 billion investment in nearby Junin 1 block. This is predicted to bring in an estimated 1 million barrels of crude oil in the coming two years. Another project includes the investment of $5 billion into a joint development fund between Venezuela and the China Development Bank. The Export-Import bank of China is also making a sizeable investment of $390 million into a new port being developed by Venezuela’s state petrochemicals company Pequiven. Another major Chinese bank, China’s Citic Group, has made moves to fund gold-mining projects in Venezuela’s large Las Crinstinas deposits. Between these and other smaller projects, China’s state-affiliated companies have significant investments in the now-tumultuous Latin American country.

 

 

While Beijing’s continued close relationship with Caracus has been beneficial thus far, Chinese leaders must certainly have a watchful eye on the Venezuelan economy and the deteriorating  political situation. With a looming currency crisis, stagnating production at the main government-run petroleum company (PDVSA), immense inflation and mounting corruption problems, Venezuela could be a sinking ship in which China has invested too heavily. Politics aside, China’s choice to move forward in Venezuela may be a risky gamble, but the lure of the largest oil resources in the world seems likely to maintain an increasingly mutually-dependent relationship into the coming years.

 

Surviving dinner with a China Hand...

Surviving  dinner with a China Hand.

China Hands can be awful bores at the best of times, the China Brain team included. Here’s a quick guide for those of you who come across one at a dinner party, or more likely, propping up the bar of an unwholesome establishment, desperately hoping to engage someone in a deep, philosophical conversation.

 

 

First things first – the basics: Be aware, of course, that if a China Hand is found outside of their comfort zone – for some that is the 6th Ring road of Beijing, for others just China in general - they will undoubtedly be feeling nervous and uncomfortable that they can’t hold court on the Middle Kingdom. If the conversation is ranging from, for instance, the upcoming London mayoral and US elections, to the continuing downfall of Tiger Woods, or even to what baby stroller to purchase for a new arrival, the China Hand will be pretending to listen. He or she may even utter the odd word, but rest assured, the Hand is simply waiting.

 

What is the Hand waiting for you may ask? They are waiting to hear the key words that will allow them to demonstrate their cavernous knowledge of what is of course the most important country in the world at the most important moment (since the last most important moment) in its very, very long history. These words are too numerous to list in full here but obvious examples are of course ‘China’, ‘Beijing’, ‘Communist’ (be careful when discussing Ken Livingstone), and somewhat mysteriously to those not in the know, ‘Hu’, ‘Wen’ and ‘Xi’. By simply avoiding the key words, you may stave off any China Hand’s attempts to wade into the conversation for a little while.

 

Basic deflection will only last so long. At some point, the China Hand may catch you unaware or the conversation may naturally move towards the most populous country in the world, which as you may be aware is soon going to be the biggest economy in the world. The very fact that China is so very important now means that the China Hand’s ability to link China to almost anything is assured.

 

For instance: You: ‘Who do you think will win the London mayoral election?’ China Hand ‘Well I’m not too sure, seeing as I actually live in Beijing, but whoever does win it will be making a beeline straight for the Chinese over there as the City wants to become the global centre for trading the Renminbi”. Or, You: “What do you make of Tiger’s shambolic behavior in the US Masters?” China Hand : “Well I’m not that into golf, but I did hear that in China, they were mystified by his fall from grace, because your success over there is kind of measured by the number of mistresses you have”.

 

At this point, it’s highly likely that you cannot avoid asking the China Hand a bit more about what he or she does in China and this is the point where you have a key decision to make.

 

Option A is you pretend (or not as the case may be) that you know little or nothing about China and are therefore ready to be ‘(re)educated’ by the great sage before you. This is the path of least resistance and will probably lead to around 20 minutes of listening to the China Hand about what life is ‘really like’ in China, no doubt helping you to understand that the Chinese are not going to take over the world quite yet and that yes, the pollution really is as bad as they say. But why would you want to be anywhere else right now as it’s currently the most important place in the world, the opportunities are endless and no, Mandarin really isn’t quite as hard as everyone says it is, blah blah blah.

 

Option A is safe and easy, but let’s be honest, why not spice things up a little? Here again, you have two options, as you can be sure that whatever you do say, the China Hand will disagree with you. Your first option is to say that you think that China’s rise has been overplayed and it’s all going to come crashing down pretty soon. As economic growth slows and social instability rises, the Party will no longer be able to keep control of all the different emotions and desires that exist within a very tightly controlled society. If you throw in the names Gordon Chang and Minxin Pei (or better yet, Pei Minxin as he would be known in China), that will undoubtedly impress. A China Hand would rarely completely agree with their particularly doom laden predictions, which incidentally have been wheeled out again recently after the rumours of a new schism at the heart of the Communist Party. That is unless of course you’re actually having dinner with Mr. Chang or Mr. Pei.

 

Option B is to say that we all might as well just give up now because China is going to take over the world soon anyway. It’s buying up our companies on the cheap, it’s grabbing whole swathes of Africa, its military is expanding at an alarming rate, alongside it’s confidence in diplomatic circles. You could even throw in the fact that it’s going to smash all records of gold medal hauls at the London Olympics with its platoon of 9 year old gymnasts.  This will probably force the China Hand into a slight corner, where he will feel duty bound to point out some of the frailties that still exist within China: continued growth is by no means guaranteed, the US still holds the dominant position by a very long way in terms of military power, innovation and entrepreneurship, and they promised not to do that thing with the 9 year olds again so don’t worry too much.

 

Your final option is what we call the social hand grenade. You turn to the China Hand and tell him or her in no uncertain terms, that you find Brazil a far more interesting, exciting, enticing topic of conversation. The China Hand will look stunned, shocked and perhaps a little bit hurt -- before responding with, “Did you know who Brazil’s largest trading partner is these days?”

 

China’s Economic Transition: Embracing...

China’s Economic Transition: Embracing the Market Allocation of Resources.

At an impasse

 

China’s economic challenge at the moment is probably the greatest it has faced since Deng Xiaoping embraced market reform in the early 1980s. Thirty years on, “Socialism with Chinese Characteristics” has passed through several stages before arriving at its current plateau in the 2010s. Without a major evolution in the national growth model, the pressures facing the Chinese economy could destabilize the achievements of the past decades.

Until now, China relied upon low-value exports and major investments to grow its economy. This model has resulted in diminishing returns in recent years. Low wages, the key ingredient to its global competitiveness in low-cost manufacturing, are no longer part of the economic equation (on average, wages rose 12% in 2012). Countries like Bangladesh and Cambodia, with rock-bottom pay and a rapidly expanding industrial base, will continue to reap the benefit of this increase as foreign companies shift production from China to maximize profits.

This trend exacerbates the problem of China’s already-excessive industrial capacity. Private companies and state-owned enterprises (SOEs) have long had easy access to credit from China’s state-owned banks. China’s population is notoriously thrifty, a characteristic that has stymied the kind of domestic consumption growth the nation sorely needs. Instead, the banks have played the essential distributive role in the economy, using the population’s saving accounts to provide cheap credit to Chinese companies, in particular the SOEs, who have been under little pressure to use this capital effectively.

 

Financial reform in the works

 

            Fortunately, the news from the Third Party Plenum in mid-November was mostly positive. Plenums in China happen on an annual basis as part of the five-year Party Congress, and the third one is often policy-focused – indeed, the market-based economic shift initiated in 1978 was similarly announced at a Third Party Plenum.

            Contemporary China may indeed be at a decision point that is in some ways as important as the one 35 years ago. Good, then, that the result of November’s plenum was a strong affirmation of market-led development. The single most talked-about sentence in the summit’s main document is that the market should play a “decisive function in resource allocation,” a deliberate rhetorical upgrade from the status quo, which declared that the market had a “basic” role in directing resources. From The Economist to Avery Goldstein, a professor at the Center for the Study of Contemporary China at the University of Pennsylvania, those whose job it is to read the semantic tea-leaves in Chinese government communiqués insist that this is a significant symbol of policy evolution. Pieter Bottelier, a professor of China Studies at Johns Hopkins, even characterized the plan as “the most ambitious reform [...] I’ve ever seen.”

            Aside from finance, other aspects of the reform include the dismantling of the labour-camp penal system, the end of the one-child policy, reform of the hukou system that defines the population’s right to live in the city, and the establishment of an elite council to execute these reforms.  

            Such a dramatic announcement of reform required Xi to amass significant political capital. To that extent, at least in the short term, “political reform” is off the table. On the contrary, Xi has increased surveillance and repression–the surveillance apparatus now costs nearly as much as the entire military budget ($111 billion USD versus $114 billion). But, notes Goldstein, further market reform may lead to political opening down the road – just not right away.

            That may be for the best. It would no doubt be practically impossible for Xi to unleash economic reform on this scale while simultaneously throwing the hegemony of the Party into jeopardy. As for the SOEs, the administration is almost certainly attempting to address the problems created by cheap credit and its economic effects (excess industrial capacity and a bloated real-estate market) by insisting on the market distribution of resources. Here Xi is admirably taking on state-owned companies that are controlled by family members of the highest-ranking government officials. With the publishing of the post-plenum document, he seems to be announcing his dominance over this gilded class to both China and the world.

 

Charting the way forward

 

Replacing China’s investment-powered growth engine with a vibrant domestic consumer market will require a cultural change if Chinese people are to part with their wages, of which they currently save about one-third. In contrast, profligate Americans manage to save only between two and three percent of their annual income.

 

 

Various government policies, including  its anti-corruption measures, which has reduced conspicuous consumption among China’s 60 million party members, and the spread of automobile limits to more cities, a measure intended to reduce China’s choking urban pollution, will also continue to exert downward pressure in various sectors.

These issues demand a strident government response. For one thing, China’s deposit savings rates, usually between three and four percent, are much higher than in most developing East Asian countries. Lowering this would encourage Chinese people to leave less money sitting in the bank. Continued de-incentivizing of real estate investment is a must: property prices have increased nearly 10% year-over-year. Thankfully, the administration’s plethora of mechanisms designed to cool the housing market, seem to be taking effect, as November 2013 showed a slowdown in property inflation compared to the rest of the year.

 

The hackneyed adage about “crisis” and “opportunity” being the same character in Chinese, a mainstay in Western motivational speeches, has an undeniable relevance at this historical juncture. China seems more confident and powerful than ever, while the world’s financial markets fret about grave structural problems and images of smog-choked cities shock the rest of the world. The concerns won’t cease until China sees itself past the current challenge into an economy that is driven chiefly by consumers rather than cheap government credit and ever-increasing industrial output. In this process, there is the potential to forge a nation that is more sustainable economically, socially, and environmentally. To fail to capitalize on this opportunity would be grave for an administration that has set out its stall to achieve a historical transformation.

 

China`s changing ambitions in Africa...

China`s changing ambitions in Africa.

Whilst Africa as a continent continues to grow at a modest pace, 6.6% GDP growth in 2012 (4.8% and 5.3% are forecast for 2013/14), the fact remains that this growth is not high enough to alleviate poverty and move countries up the Human Development Index (HDI). Growth alone has proved to have little impact on poverty reduction. Whilst resource rich African countries continue to benefit from relatively high commodity prices, this represents a short-term positive. It`s infrastructure, power production and intra-African trade (via locally manufactured goods) that will push countries up the HDI on a durable and sustainable growth path and this is where China could prove to be the making of the continent.

 

 

 

Whilst China-African relations have been shaped in the past by China securing the supply of resources and financing the infrastructure to obtain them, the future will be a far more expansive relationship, involving both the state sectors and private entrepreneurs selling to Africa’s consumers, and not just outsourcing production there. To facilitate this, China currently deploys some 150 commercial attaches throughout the continent..

 

Africa represents about half of the 25 fastest growing economies of the world, meaning rapidly accelerating consumption of made in China products: everything from low cost textiles to up-stream advanced technologies are suitable for African markets and the rapidly growing middle classes. Private investment is simultaneously taking advantage of the wage cost differential and adding value to products on African soil, if not carrying out the full manufacturing process there. On a recent visit to Ethiopia, the landscape I encountered transported me back to Guangdong with its neat lines of machining factories.

 

   

 

Surprisingly China currently lies in 6th place behind the UK, India, USA, UAE and France in terms of greenfield investment, however the ambition is there to increase this dramatically. Chinese FDI is currently re-focusing on the manufacturing and infrastructure sectors, and current Chinese governmental subsidies are now aimed at developing industrial parks, to both enhance manufacturing capacity as well as facilitate technology and skill transfer. In return African Nations will increasingly be expected to support China`s policies in international forums. China increased its share of total African exports from 3.2% in 2000 to 13% in 2011, whilst investment has gone from US$100 million to more than US$12 billion in the same period.

 

Potential stumbling blocks that must be addressed now by the new Government are: environmental concerns, worker safety, compliance with local labor law and corporate social responsibility. Currently Chinese businesses on the continent often rely on imported Chinese labor, offer limited job training or opportunities for Africans to rise beyond unskilled work and continue to have image problems among the local populace.  China is not unaware of such issues and is actively addressing its image problem in Africa with vigorous soft power initiatives: 5,000 fully paid scholarships to Chinese Universities, technical training for over 30,000 Africans, the launch of the very slick CCTV Africa as well as numerous local grants for infrastructure projects. China is fast addressing its image in order to reverse hostility towards deeper economic engagement.

 

China, not only has the supply chain in place, the FDI, the political will, but also a multitude of both smaller and state run companies well placed to provide the skills, technology and materials needed to realize Africa’s structural transformation: the reallocation of economic resources from activities with low productivity – such as small farming and informal trading – to more productive ones – such as manufacturing, will ultimately define the rate of development of the African Continent as China’s demand for African raw materials  grows at a slower pace each year.

 

 

 

 

Human development in Africa

Very high and high human development

Algeria, Libyan Arab Jamahiriya, Seychelles, Tunisia.

 

Medium human development

Botswana, Cape Verde, Egypt, Equatorial Guinea, Gabon,

Ghana, Morocco, Namibia, South Africa, Swaziland.

 

Low human development

Angola, Benin, Burkina Faso, Burundi, Cameroon, Central African Republic, Chad, Comoros, Congo, Congo, Demireps. Côte d’Ivoire, Djibouti, Eritrea, Ethiopia, Gambia, Guinea, Guinea-Bissau, Kenya, Lesotho, Liberia, Madagascar, Malawi, Mali, Mauritania, Mozambique, Niger, Nigeria, Rwanda, São Tomé and Príncipe,

Senegal, Sierra Leone, Sudan, Tanzania, Togo, Uganda, Zambia, Zimbabwe.

Source UNDP 2013

Books: China`s Urban Billion, the Bigges...

Books: China`s Urban Billion, the Biggest Migration in Human History.

By Tom Miller for China Brain.

 

The journey from farm to city is the story of China’s transformation from a poor and backward country to a global economic superpower. By 2030, when China’s urban population is projected to swell to 1 billion, its cities will be home to one in every eight people on earth. How China’s urban billion live will shape the future of the world.


 

Nowhere is China’s urban miracle more obvious than in Chongqing, the largest city on the upper reaches of the Yangtze River. Once a rusting laggard, marooned far from the dynamic cities of the eastern seaboard, this rough-and-ready river port is undergoing a spectacular transformation. Over the past decade, hundreds of towering apartment blocks have sprouted from the city’s deep red soil, and new bridges have soared across its muddy riverbanks. The skyline, a thicket of skyscrapers, already resembles Hong Kong’s. Yet the construction frenzy shows no sign of slowing: entering Chongqing is like walking into a giant building site. On the city’s northern outskirts, bulldozers flatten wooded hills and lush ravines to satisfy property developers’ insatiable appetite for land. Near the airport, teams of construction workers lay track on a new monorail, which will eventually run to nine lines. And at the heart of the old city, wreckers armed with pickaxes hack at a tangle of grimy slums.


 

Chongqing municipality is often wrongly called the world’s largest city. It is actually a mostly rural city-province a little larger than Scotland, with a resident population of 28 million. Around one-quarter of these people live in the city proper, which is rapidly expanding to accommodate an enormous influx of new urban residents. By 2020, planners expect the city’s population to top 12 million. A model of central Chongqing at the municipal planning centre shows a sea of skyscrapers and smart residential compounds dappled by green, verdant spaces. Accompanying captions confidently proclaim that six big cities, 25 smaller cities and 495 towns will surround the core megacity, “just as many stars encircling the moon”. In the local government’s cosmic view of their city’s development, “A new Chongqing is galloping to the world.”


 

Amid all this spectacular development, it is easy to miss the poverty on the ground. Urbanization has brought enormous wealth to the city, but the millions of rural migrants who work on building sites, serve in restaurants, and rub flesh in massage parlours remain poor. Many new arrivals from the rural counties that surround the metropolis struggle to scratch out a living. Not far from the city centre, scrawny men flog pirated porn DVDs from pavements sticky with cooking slop, rows of women sweat at sewing machines in dank basements, and crowds of unemployed migrants gather at an outdoor labour market. On the mossy stone steps that lead down to the Yangtze River, shirtless old men toil under stout bamboo poles laden with heavy, wicker panniers, their muscular calves bulging like tennis balls. Chongqing’s famous army of “stick men” are just as much a part of the modern city as rich businessmen sipping cocktails in glitzy bars.


 

Chongqing’s leaders want many more rural people to migrate to the city and other towns within the municipality. They believe that faster urbanization will unlock economic growth and boost rural incomes. Their ambitious goal is to double the municipality’s urban population from 10 million in 2010 to 20 million by 2020. This kind of direct promotion of urbanization is new: for the past 50 years or more, China deliberately held back the pace of migration, partly for fear that cities would not be able to cope with a vast influx of migrants. Chongqing’s plan jibes with a shift in national policy: China’s 12th Five Year Plan, which runs from 2011-15, explicitly calls for more urbanization and supports the emergence of giant megacities. Li Keqiang, the incoming premier, has consistently expressed his support for speedier urbanization nationwide. But policy makers are playing a high-risk game: forced urbanization could dramatically improve millions of lives—or vastly swell the ranks of the urban poor.


 

Even without explicit central-government support, China is already urbanizing faster than expected. In 2011, the country passed a development milestone: for the first time, more than half its citizens lived in towns or cities. The number of people in urban areas jumped to 691 million, taking China’s urbanization ratio past 51%. In the development stakes, that puts China many decades behind rich economies like the United Kingdom and the United States, which became predominantly urban countries in 1851 and 1920 respectively. But China’s urbanization process is occurring at a mind-boggling rate. In 1980, fewer than 200 million people lived in towns and cities. Over the next 30 years, China’s cities expanded by nearly 500 million—the equivalent of adding the combined populations of the US, the UK, France and Italy.


 

The primary driving force behind urbanization is economic. Migrant workers earn far more than those who stay on the farm. And the productivity gains from the twin processes of urbanization and industrialization are vital for the national economy: moving hundreds of millions of people out of economically insignificant jobs on the land, and into factories and onto building sites in the city, produces enormous economic growth. Mass migration to the cities makes sense both for individual farmers and for the country as a whole. For this reason, nothing is likely to halt the huge migration from farm to city—bar economic collapse, political turmoil, or some other cataclysmic event. Historical experience, economic logic and government policy all point to the same conclusion: by 2030, 1 billion Chinese will live in cities.


 

This leaves two central questions. What kind of lives will China’s urban billion lead? And what will China’s cities be like?


 

China’s urbanization numbers are very impressive, but they hide an unpalatable truth: a large chunk of Chinese urbanization is bogus. At least 230 million people in Chinese cities do not live genuinely urban lives, because migrant workers from the countryside are not entitled to urban social security and face institutionalized discrimination in the cities. China’s household registration—or hukou—system legally ties migrant workers to their rural home, preventing them from putting down proper roots in the city. Rural migrants in the city lead segregated lives, hidden away in worker dormitories or slum villages. As temporary residents with few legal rights, most migrants remain trapped in low-income jobs, save as much as they can, and buy few goods or services. For this reason, China has failed to reap many of the economic benefits from its huge surge in migration.


 

The rapid modernization of urban China over the past couple of decades is astonishing, but social stratification is worsening. Without hukou reform, China’s cities will soon be home to several hundred million second-class citizens. Even the lucky residents who enjoy full urban rights must put up with clogged roads, polluted skies, and cityscapes of unremitting ugliness. China is trying hard to make its cities more liveable, but the sheer speed and scale of the urbanization process mean this will be extremely tough to achieve. The problem is made worse by urban planners’ impoverished view of modernity, which often requires obliterating the past to make way for the new. China’s cities will continue to shock and awe—but they will struggle to inspire hearts and minds.


 

城市化


 

For 30 years, China has pursued an exploitative model of urbanization that allowed it to industrialize on the cheap. But that model has run its course. As China’s cities grow, their biggest challenge is to find a healthier path to urban development. This book aims to show why this must happen and to explain how it can be achieved. First, it describes the process by which hundreds of millions of people will move off the land and into the city. And second, it suggests how China can begin to create liveable cities that fully capture the economic benefits of urbanization.


 

China’s internal migration bears comparison with the great migration from Europe to the US a century ago. Every year, millions of farmers leave the drudgery of the fields for the bright lights of the cities. Most migrants arrive in the city empty handed, live in squalid conditions, and do the dirty work that no one else wants to do. In return, they are denied health care, schooling for their children, and basic social security. As more migrant families begin to settle in cities permanently, equitable access to affordable housing and social welfare is becoming a pressing issue.Integrating hundreds of millions of rural migrants into urban society is one of the greatest challenges, both economic and social, that China faces over the next two decades.


 

A crucial step will be reforming the household registration system. Because migrant workers do not have local residence permits, they are treated like illegal immigrants in their own country. Pressure to reform the dispiriting hukou system has been growing since the late 1990s, but the central government has failed to make any fundamental changes. New plans to extend an alternative system of local residence permits to migrant workers in cities across China are encouraging. But city governments will struggle financially to provide migrant workers with more urban benefits. If China is serious about delinking social security entitlements from citizens’ hukou status, the central government will have to bear much more of the financial strain.

 

 

Tom`s book: China`s Urban Billion, is available from Amazon

 


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Tom Miller is Senior Asia Analyst at Beijing-based research firm Gavekal Dragonomics and a former China correspondent for the South China Morning Post. Tom has spoken at Chatham House in London, the Friends of Europe think-tank in Brussels, and the World Bank in Beijing. He has written op-eds for the Financial Times and appeared in the Wall Street Journal, New York Times, Economist​, Guardian, Reuters, BBC and CNN, among others. He has lived in China for 13 years.
 

China’s image crisis

China’s image crisis

Sandwiched between articles on the smog in Beijing and the political machinations of the Chinese government, a BBC article a few weeks ago featured Chinese painting, calling it “one of the world’s oldest continuous artistic traditions – and so innovative that it was centuries ahead of the European art movement”.It neatly exemplifies the main thrust of this article – China currently has something of a media-led image crisis outside its borders that threatens its ascendancy in the world order. Who can be sure of what China stands for when the CCP is quite so opaque?

So how do people all over the world view China? Perceptions appear to be almost as diverse as the country itself but key themes of surging economic growth, the prevalence of ‘Made-in-China’ products,  and rapid urbanization on an unprecedented scale all make a strong showing. According to a recent poll, 23 out of 39 nations believe China either has or will soon supplant the US as the world’s next big superpower. Whilst close neighbours view China negatively (just one in twenty Japanese think of the Chinese in a positive light), what makes 79% of El Salvadorians choose the US over China? After all, the US had a tendency to favour dictators in Latin America while China has a booming economic relationship with the region. The Chinese, for their part, think this is quite unfair – the majority, in a survey by the Pew Research Centre, felt their country deserved more respect globally than it gets now.

 

The cultural and linguistic gulf between the West and China is undeniable, but is underscored by the Chinese immigrant story in the West, that still taints perceptions. As with other immigrant groups, first generation Chinese made their niche in classic immigrant sector jobs characterised by manual labour, often catering to the needs of the local communities where they settled in businesses such as restaurants and laundries.This led to historical stereotypes associating the Chinese with laundries and restaurants.

 

In recent years this has changed as university towns are inundated with an influx of wealthy Chinese students who represent a wholly different category of educated, ambitious Chinese expats. Chinese business people are welcomed globally as the carriers of much needed investment and Chinese tourists are even spoken to in their native tongue in the most fashionable shopping districts such as 5th Avenue in New York and Knightsbridge in London .

 

The Western media’s portrayal of China, also contributes significantly to China’s global image crisis. International politics is obviously a major factor in the media’s decisions, but so is the Chinese government’s press censorship policies –in a vicious cycle, the censorship tends to antagonise the press further, causing more ‘bad press’. But as China’s grip on the world economy tightens, Western media may choose to impose self-censorship to protect their business interests in the country: the recent New York Times article on Bloomberg editors halting publication of an article that questioned the uncomfortable relationship between the Chinese leadership and business being one such example.

 

The most obvious vehicle of Beijing’s soft power efforts has been the Confucius Institutes – there are ten in France, nine in Germany and seventeen in the UK alone. But even this soft power is soft power, Chinese style. The Chinese government’s heavy-handed dealings with its neighbours – such as the recent unilateral extension of air-defence identification zone over the disputed East China Sea islands – belies the promise of panda diplomacy. No amount of Mandarin lessons will decrease the anxiety nations around the globe feel upon seeing China’s border disputes with almost all its neighbours. The obvious question they ask is, ‘If that’s what the next superpower does to its neighbours, what happens if we ever land in their bad books?’

 

Nevertheless, there are many nations where China is making steady inroads in gaining prominence – for them Chinese business is key to survival and China is a ‘partner’. Asian countries, such as Pakistan and Malaysia, and African nations, such as Senegal and Kenya, lead the pack when it comes to pro-Chinese views. For 4 of the 5 former Soviet Republics, China is their largest trading partner.  In some regions it is a case of strategic alliance – Pakistan, for example, receives military support from China, which shares its antipathy towards rival India. In other nations, it is the business angle that triumphs –China is Ghana and Kenya’s second largest trading partner, Nigeria’s fourth, and Senegal’s fifth. This scenario is similar to Latin America as well. (China Brain has covered China’s trade relationship with Latin America in detail, particularly Brazil and Mexico.)

 

The Chinese government’s approach in Africa has been an intelligent one: “Soft power, Hard cash”, along with the launch of CCTV Africa and its numerous partnerships with African media bodies.Its positive coverage of African affairs, focusing on the self-reliance of Africans in developing Africa, also sets itself apart from the Western media’s mostly doom-and-gloom coverage of the continent. This has helped it gain significant popularity as an alternative source of credible news in the region. The charm offensive is also helped by heavy investment in building infrastructure, which are very visible sources of cooperation between the nations and plays a role in garnering much needed  public support.

  

To understand to what degree this approach has been successful one should look at some of the voices coming out of Africa that quite worryingly question the very basis of liberal democracy in favour of China-style state capitalism: ‘Why wait for lacklustre democracy tomorrow if you can get a job or a new roof over your head today?’

 

Some of the criticisms levelled against China – lack of freedom of expression, workers safety, etc. – certainly also merit some serious internal reflection. The way forward for China therefore lies in a combination of rethinking its media policies, along with strengthening its soft power initiatives. Defining a brand, that fits with the country, of who it is now and who it hopes to become in the future, can be the first step in this process. The country contains so much young talent and ability that is simply under represented to the world. In doing so it can draw significantly on its glorious history of arts and culture to establish ‘Brand China’, but it also needs to promote the intellectual and commercial innovations from a fresh emerging China, least its image remain in a quandary.


 

Brazil-China trade relations: end of...

Brazil-China trade relations: end of the honeymoon?

China’s phenomenal economic growth has made it the second largest economy in the world in a relatively short time. In the process, its impact on Brazil has been significant. The two countries have long been allies; China recognised Brazil as a ‘strategic partner’ in 1993, the first country in the Latin American region to be accorded this status. The commodity related interdependency between the two countries is so high that it has even lent itself to the official name for a classification of ship type – Brazil developed massive ships called “Chinamax” to ply mineral ore from Brazil to Chinese ports. Over time “Chinamax” has become the standard name for ‘very large ore carriers’. In this article, China Brain explores how the relationship between the two countries is evolving and why tension has been rising in recent years.

 

Bilateral trade

The rhetoric from the two nations is still overwhelmingly positive. As the Brazilian foreign minister put it in 2004, “We are talking about the relationship between the largest developing country in the Western hemisphere and the largest developing country in the Eastern hemisphere”. Brazilian exports to China rose massively from $1.1bn to over $21bn in the first decade of the twenty first century. At present China is Brazil’s largest trading partner, although, crucially, Brazil is not even among China’s top ten trading partners. In the following sections we explore the nature of this asymmetry and what it means for the countries involved.

 

 

 

Primarization of the Brazilian market

 90% of Brazilian exports to China are primary products such as iron ore and soybeans that satisfy the Middle Kingdom’s need to build its new skyscrapers and feed its giant population. Brazilian commodity businesses have long been riding high off the back of China’s growth. Contrast this to Chinese imports into Brazil – in 2009, only 1.6% of total Chinese imports were primary goods. The majority were relatively low cost consumer appliances, which have put price pressure on local manufacturers. Many Brazilians now see Chinese companies as direct competitors and a threat to their own employment. The combination of these two forces is threatening to move Brazil further down the technology ladder and regress into a less industrialised market.

 A possible explanation for this ‘primarization’ is that as a resource-abundant country, Brazil’s comparative advantage over China is only in primary goods. But studies indicate this is not always the case. Machado and Ferraz (2006) identified 58 products that Brazil was not exporting to China despite having a comparative advantage in their production. In these cases it was the Chinese government’s import substitution-protectionist policies that were barriers because China imposes escalating tariffs on processed products.

 Unfortunately, any attempt to even the playing field between the two countries is fraught with danger. In 2010, when Argentina tried to restrict import on Chinese manufactured products, China retaliated by stopping soybean oil imports from Argentina. Trade relations did not normalise till Argentina ultimately relented six months later. Brazil cannot afford to make the same mistakes. If China closed its doors to Brazilian goods, however temporarily, the impact on Brazils’ economy would be disastrous.

 

Battling in third markets

 

Brazil and China are not only competing in their respective domestic markets; they are competitors in other nations too. Here the battle is fierce, and highly tilted in favour of China. Between 2003 and 2010, Brazil’s share of the US market fell by 0.15 points while China’s rose by 6.54 points. In Argentina, China has already displaced Brazil as the chief supplier of home appliances. This is why both Brazilian manufacturers and government officials have begun to voice their concerns, leading to China developing a serious ‘image problem’ in the Latin American business sector.

 

China can counter this image problem if it intelligently disseminates information on how its inelastic domestic demand for commodities has boosted prices globally. So when Brazil now sells commodities in third markets, they can piggyback on the global price hike led by rising demand in China. Studies show that if China’s impact on the global market prices on commodities was removed, Brazil would have lost between $9bn and $14bn in income since 2007. This is a significant figure in Brazil’s $2.5tn economy.

 

Direct investment evolves

 

Initially, China’s relationship with Brazil was one based on the import of Brazilian produced products. Prior to 2009, Chinese FDI in Brazil was nominal. But from 2009 to 2010, it rose sharply by $310m, making the current stock value of Chinese firms in Brazil $20bn. This may actually represent the lower end of the scale of the true value because a lot of the funds are transferred through off shore accounts in tax havens and the real value of Chinese FDI is notoriously difficult to estimate.

 

The main areas of Chinese investment into Brazil have been natural resources like mining, oil, gas, etc. Coupled with investment into Brazilian agribusiness, like Chinese state group BBCA sinking $320m to build a maize processing factory in Brazil, it shows a continuation of Chinese export strategy into FDI strategy. Rather than buying commodities from Brazilian producers, Chinese businesses are now buying Brazilian mines and companies so they can serve their own needs more directly.

 Chinese investment into the Brazilian manufacturing sector is also rising. Chinese automotive company, Chery Automobile Co, plans to build a factory for engines and gearboxes in Brazil. Technology company, Huawei, has already set up business in Brazil, relying on more than 90% Brazilian employees to run the company to good effect. In the beginning of 2011, Huawei’s local revenue reached $1bn, proving the future for Chinese technology companies in the Brazilian market is promising. Financial acquisitions are also increasing, albeit slowly – only last month, China Construction Bank Co. signed a deal to take control of a small Brazilian bank called Banco Industrial e Comercial.

 Brazilian FDI into China, on the other hand, has remained steady for the past decade at $500m, i.e. only 0.04% of the total stock of FDI into China. This comparatively lower FDI is explained by the difficulties foreign firms face when navigating the unfamiliar rules and nuances of the Chinese market.

 Unfortunately, the Chinese government still limits which sectors foreign firms can invest in. Sectors they consider strategic, such as energy and advanced communication technology, are strictly off limits. Firms working in other industries however have been lured in by the inexorable expansion of the Chinese market. One such example is Brazil’s sole business jet aircraft manufacturing firm, Embraer, which operates in China from the Harbin region. The firm projects that within the next two decades, Chinese airlines will require over 1000 new jet aircrafts (which is 15% of global delivery of jets). Embraer does plan to tap into this market. But despite the phenomenal projected growth in China, Embraer’s biggest FDI to date has been in the United States so progress in China has been limited.

 

Future

 Brazil and China’s trade relationship, even in its present form, is beneficial for both parties but inherently lop sided. Brazil’s narrow specialisation on commodities, plus its over-dependence on the Chinese market, may turn out to be dangerous. After decades of unbridled double-digit growth, the Chinese market is beginning to slow down – some analysts put this year’s projected growth at 7.5%. Not only will this lower the demand for Brazilian commodities in China, it will also have a negative impact on the price of commodities in the global market. Brazil will then have to deal with significant fallout from its over-dependence on China.

 Brazil can avoid this catastrophe by diversifying its exports and producing higher technology products, as well as commodities at different stages of processing. Though reports suggest Brazil has been making tentative efforts to diversify, their ultimate success will also depend considerably on the flexibility (or not) of the Chinese government in opening up more sectors for direct investment.

 

Pictorial: Chinese Catholics 天主...

Pictorial: Chinese Catholics 天主教

Literally the “Religion of the Lord of Heaven” there are estimated to be some 12 million practicing Catholics currently in China.  Of which some 5 million belong to the official Catholic Patriotic Association, having some 70 Bishops in around 6,000 churches nationwide.

There are many villages throughout China where Catholicism has been deeply rooted, some since the first Missionaries during the Yuan Dynasty, their practices being strongly identified with the Jesuits. Patricia Calvo ventured to one such village near Xiàn in Shaanxi.

All Images © Patricia Calvo 2013

 

Pictorial: Chongqing

Pictorial: Chongqing

When Jiang Jieshi, otherwise known as Chiang Kai-Shek  set up Chongqing as the capital for his Republic of China, he could not have envisioned the journey that the city would take. 

 

 

Achieving the status of a municipality in 1997 as part of the Chinese government’s attempt to speed up economic development in the central and western regions, Chongqing is now one of China’s five ‘National Central Cities’, along with Shanghai, Tianjin, Beijing and Guangzhou. The municipality has a population of 32.8 million although it is actually estimated that the number of actual urban residents stands at about six or seven million.

 

 

By all accounts, this economic initiative has been a success. Chongqing plays a central role in the the military, iron and steel industries, with heavy industry accounting for 71.5% of Chonqing’s gross industrial output. It is one of the countries three largest aluminium producers, and is home to Asia’s largest aluminium plant, South West Aluminium. Within these heavy industries, transport equipment takes the lion’s share at 29.3% of gross industrial output. Chongqing is the third largest centre for motor vehicle production, and the country’s largest producer of motorcycles. Car and motorbike manufacturers in Chongqing include Changan Automotive Corp, Lifan Hongda Enterprise and the Ford Motor Company.

 

 

The consumer market in Chongqing is also booming, as disposable income increases along with the industry. Total retail sales increased by 18.7% in 2011, standing at RMB 348.8 billion.Logistics has  developed to keep up with ever increasing demand. The imposing and controversial Three Gorges Dam has the potential to provide up to 22,500 MW of electricity. It also increases the shipping capability of the Yangtze river, making shipping from Chongqing to Shanghai quicker, cheaper and safer. Work has also begun on the Shanghai-Wuhan-Chengdu High-Speed Railway, which will connect Chongqing to a 2,078km east-west high-speed railway line.

 

 

Chongqing is also leaning towards the electronics and information industries. Foxconn have a manufacturing base there, as do Hewlett-Packard Co. Several new development zones such as the Chongqing New North Zone will hopefully provide an industry hub. Indeed, the Chongqing local government hopes that high technology manufacturing will eventually account for a quarter of all its exports. 

 

 

So, Chongqing sees a bright future ahead. It aims to become a major oil hub, processing crude oil from Burma, the Middle East and Africa and transporting it across China. At the same time, the city also promotes green industries: large companies such as Suntech are already important operators, and the city authorities are actively encouraging more green start-ups.Naturally, there are caveats. The last decade in Chongqing’s history has also been marked by corruption scandals, environmental problems and social inequality. However, Chongqing hopes to move past this and become a model of urban development for the rest of China to follow.

 

 

All Photographs © Patricia Calvo

Weibo Marketing Case Studies: How to...

Weibo Marketing Case Studies: How to Manage a Brand on China’s Social Network.

An unprecedented opportunity.

 

 

China’s biggest social networks can be incredibly fertile ground for successful marketing to China’s growing consumer base. One aspect of social-media usage in China stands out compared with that of other countries: it has a greater influence on purchasing decisions for consumers in China than for those anywhere else in the world. Chinese consumers say they are more likely to consider buying a product if they see it discussed positively on a social-media site, and more likely to actually purchase a product or service if a friend or acquaintance recommends it on a social-media site. This is explained by a cultural twist where: Chinese consumers disproportionately value peer-to-peer recommendations, as the Chinese are more skeptical of formal institutions.

 

Sina Weibo – the most significant of China’s diverse archipelago of social networking hubs – boasts 368 million active users, predominately in their twenties and early thirties, are higher income earners (more than 8,000 renminbi (about $1,300) a month), are much more likely to live in Tier 1 cities, and who buy 54% of China’s goods and services. Furthermore 140 characters in Chinese is able to express a lot more than in a western language, Weibo has also pioneered the inclusion of video and photographic images in their posts. The facts are clear: Weibo presents a huge opportunity to market to China’s most influential consumer segment.

 

But how do Western companies succeed at Weibo marketing? Here we look at several case studies of social media success, from well-constructed marketing campaigns to simple re-posts that have echoed through the online masses.

 

1) The Masterstroke: Dove Chocolate and Valentine’s Day

 

Dove Chocolate, a subsidiary of American confectionary company Mars, scored a flashy online marketing coup with its viral campaign on Valentine’s Day, 2012.  Dove engaged the savvy marketers at SapientNitro, a Shanghai-based agency, who came up with a way to promote Dove chocolate without any external costs.

 

To attract users’ attention, SapientNitro used the story of installation artist Ma Jin, who wanted to build a life-size fantasy carriage out of Dove’s distinctive heart-shaped tins. In a concise but heartfelt webcam video, Ma explained his plan to surprise his sweetheart with his home-made gift made from chocolate boxes, and asks fellow users to send him their empty boxes to help him complete his project.

 

SapientNitro’s idea paid off big time. The simple video engaged users’ emotions, and asked them to engage with the consumer product, but in an elegant twist, didn’t specifically suggest buying anything. With its simplicity, emotional appeal, and heartfelt call for users’ participation, the video was loaded with viral potential. As noted on techinasia.ca, the resulting statistics proved SapientNitro’s social media brilliance: the video was reposted 47,000 times, and attracted 34,000 comments. In the end, sales of Dove’s Valentine’s Day product increased 226%.

 

 

2) The Timely Post: Durex Condoms and the Beijing floods

 

Sometimes companies hire cutting-edge agencies to handle their Weibo marketing. Other times, users give out brand image-building content for free. So it was with one popular Weibo user, who regularly produces humorous content for his 8,000 followers, during the large-scale flooding that Beijing experienced in 2011. The Weibo user demonstrated an unorthodox use of condoms, stretching them over his sneakers to make for an impermeable layer that protected his feet from the floodwaters.

 

 

Durex had some quick-thinking Weibo guru, who, two minutes after the user published his original content, re-posted on the condom manufacturer`s weibo account to its 100,000 followers, and interacted with them live as they replied.

 

Durex’s move, a costless repost that relied only on social media vigilance and timely action, resulted in a further 40,000 reposts and 7,000 comments. As a major natural event that caused more annoyance than destruction, the floods were a perfect example of a hot trending topic where smart marketers can jump in to remind users of a product with a humorous or playful post.

 

3) The Official Online Campaign: Coca Cola’s Customized Bottles

 

Coca Cola launched its most recent global advertising campaign earlier this year in Europe, where it sells bottles with names common in each major European country to boost sales. In China, Coke has also altered its labels for the promotion, but put short phrases like “beautiful girl” on the bottles, rather than common names.

 

Online, however, Coke recently took the customization one step further, and allowed users to order personally customized bottles online through Weibo Wallet, Sina’s nascent social media payment service. To sweeten the deal, Coke charged users only the shipping fees, 20 Yuan, to support its 5-day promotion. Coke also posted pictures of celebrities holding their personalized bottles, and buyers followed suit, posting pictures of themselves holding their personalized bottles to share with their friends and Weibo followers.

 

Methodical, logical, and successful, Coke’s flashy and expensive approach to Weibo marketing suits the stature of the multinational beverage corporation, and is conducted in harmony with advertising in other forms of media. With the combination of depicting celebrities holding personalized Cokes and enabling consumers to obtain them at a reasonable price, Coke generated significant Weibo buzz in the form of thousands of personalized images that reinforce the popularity of the brand and its status as a drink of choice for young people. Although it invested more in its marketing push, and sold hundreds of thousands of personalized bottles at a loss, Coke will definitely reap the benefit of such a unique online campaign.

 

 

A Question of Interactivity

 

Outside of campaigns and special events, brands fare best on Weibo when they integrate customer service into their social media platform. Retail and household products brands from Burberry to IKEA have made this important move, responding to customer’s inquiries and problems directly. This helps reinforce the image of a foreign brand that is both responsible when it comes to its products, and engaged in local Chinese consumers. Combined with regular commenting and posting, this strategy helps to cultivate an image of a company as a lively and responsive organization.

 

Above all, the key feature of these three very different examples of marketing on Weibo is the ability to create and develop a conversation. Companies that are able to synchronize their online marketing with the conversational nature of social media succeed on Weibo, while those that aren’t able to provide conversation-provoking content are left behind.

 

In the case of Coke’s campaign, the conversation was about the product itself, the excitement of having a personalized version of such a ubiquitous mass-produced article. For Dove and for Durex, the conversations were already going on, but both companies managed to spin trending topics (Valentine’s Day and the 2011 floods) in the direction of their products. And while Coke’s campaign was certainly a success, brands with far more limited advertising budgets can still make a huge impact on Weibo by harnessing the creativity of China’s new net-savvy young agencies.

 

 

Entrepreneurs for a Global marketplace:...

Entrepreneurs for a Global marketplace: Duoban, Xiaomi & Light in a box.

Fake designer handbags, expertly copied Old Master paintings, and even fake real-life versions of Paris and other European cities: China is undoubtedly home to some of the world’s most skilled and prolific plagiarists. Much ink (and many pixels) has been spent in Western magazines and blogs to analyze China’s culture of copying: is it a deep-seated cultural preference, a product of lacklustre intellectual property laws, or has it sprung up for some other reason?

Either way, it’s easy for commentators to overlook the innovation occurring in the Chinese business world today, especially in the nation’s internet and tech start-ups, many of which are based in Beijing. As China’s economy matures, and the demand of its vast population for locally produced goods grows, expect to see more new ideas from the nation’s entrepreneurs to arise. Ideas that will serve local demand but could ultimately prove disruptive on the global stage.

In this editorial, China Brain will introduce three disruptive innovators with world-class visions. Operating in the worlds of social media, cell phones, and e-commerce, these three leaders represent the cutting edge of Chinese entrepreneurialism that is ready to compete with the world. They are three people we expect to become household names inside and outside of China in the near future.

 

Bo Yang – Douban

 

 

In many ways Bo Yang, commonly known by his Weibo moniker Ah Bei, is a hero amongst Chinese youth. He is the inventor and founder of Douban, a site which combines all the functions of a social media platform, IMDB, a MySpace-style music sample source, a gig and event guide, a radio station, an RSS feed, and a comprehensive discussion forum. Its vast arc of content has attracted more than 62 million registered users, and its enormous popularity, especially with China's intellectually and alternatively minded, is unparalleled in the world.

It is principally a site for the sharing of thoughts and interests, but unlike Twitter does not restrict its users to 140 characters to express themselves. Douban allows for lengthy discussions on the poetic works of Borges, the post-modernism of contemporary Japanese anime, the politics of modern art and many other specialist and esoteric topics. Its reputation for these kinds of discussions, however, has brought it into some censorship confrontations with the government. After a series of touchy discussions, a ban on that most sensitive of topics, Tiananmen 1989, has now been thoroughly enforced.

The site is also good business, for more than just Bo Yang. The books, films and music talked about are all linked to external shopping websites. For example, Douban is now the top affiliate of Amazon China, Dangdang and a handful of other book retailers. Douban users spend a total of RMB200million on books every year.

 

Lei Jun – XiaoMi

       

 

Lei Jun, is the 43 year old founder and current CEO of XiaoMi, a company which produces fashionable and reliable alternatives to iPhones and Samsung Galaxies, at lower prices. The company began as an internet start-up back in 2010 and has grown exponentially since the release of its first Android-based smart phone in September 2011. In the first half of this year alone, XiaoMi have sold 7.03million handsets, worth a total of US$2.16billion, and are on target to more than double 2012's total sales and profits.

 

Also the Chairman of Kingsoft software company, with a stake of US$300million, Lei Jun is a self-styled Chinese Steve Jobs, even down to the black shirt and jeans he regularly dons for press conferences and launch parties He has drawn some criticism from the Western media for this behaviour with some viewing his success based on a shameless like-for-like imitation of the world’s most successful innovator. More of this criticism may be flooding the media again soon as XiaoMi are set to release their first tablet device later this month, rumoured to be priced at just RMB999 (US$163).

 

But the company's model of high-power, high-tech phones at affordable prices is certainly a popular one. The company has already spread to Taiwan and is now targeting the technology-saturated Hong Kong market. Other potential markets are those of South East Asia, India and perhaps certain African countries. In these emerging markets, low cost, high-tech smart phones and tablets have the potential to 'leapfrog' the need for personal computers. In fact, this process has already occurred in many places within China.

By offering quality products at a lower price point, Lei Jun is already a towering success story within Mainland China. Both his and XiaoMi's reputation, despite the criticism of, in the New York Times' words, “aping” Apple's success, may soon reach the global stage. His is a name to look out for.

 

Alan Guo – LightInTheBox

       

The third entry on our list is perhaps the most startlingly innovative e-commerce founder based in China. In an interview with Silicon Valley blog PandoDaily, Guo described his business LightInTheBox as “cell-based, flash manufacturing.” Basically, Guo and his colleagues are harnessing China’s inexpensive and adaptive manufacturers to the global consumer market – and they’re doing so directly, cutting out the middle man- the traditional retailers.

High-end garments such as wedding gowns are one area where LightInTheBox has a particular edge. The company can deliver an individually tailored product in less than a month for less than 250$ U.S. The key innovation is on the factory floor: rather than producing the same design for weeks, workers are divided into smaller teams equipped with computer screens that tell them which design they are meant to be working on, allowing factories to maintain a portfolio of wedding dresses for LightInTheBox and to produce models in particular measurements on the fly.

By tweaking the traditional Henry Ford-developed factory model, Guo is helping to adapt large-scale manufacturing processes for the individualized consumption of e-consumers. A veteran of Google and Microsoft’s Asian arms, Guo has spent most of his adult years in the U.S., and holds a PhD from Stanford. Bringing his experience of working in top-notch U.S. tech companies has granted him an edge in developing an idea that could only have been born in China. 

Buying personally tailored products on the internet isn’t new, but reorganizing garment manufacturing, especially in the world’s clothing production powerhouse is. Apparel will be the leading driver of growth in e-commerce over the next several years, according to a study published last year by digital media market analysis firm eMarketer. LightInTheBox appears well-positioned for future growth with both a successful strategy to attract consumers and a unique manufacturing process that is specific to China.

The burgeoning prospects of these three entrepreneurs show that the future is bright for those individuals with new ideas and an ability to provide what the new consumer class in China wants. Successful Chinese companies and start-ups are no longer just copycats. There is genuine innovation emerging, and much of it merits exposure to the markets outside of China. There is a new generation graduating from China's elite universities as we speak. This is a generation thoroughly saturated in technology, in the logic of the free market and with truly international outlooks. China Brain's further prediction, then, is that there is a whole generation of innovative business leaders waiting to fill the shoes of Bo Yang, Lei Jun, Alan Guo, and others. What will that generation promise China and the world?

Notes on a Scandal: Lessons from GlaxoSm...

Notes on a Scandal: Lessons from GlaxoSmithKline’s Chinese Challenge.

In January, an anonymous individual contacted U.K. pharmaceutical company GlaxoSmithKline’s senior executives to notify them of systemic abuses in the company’s Chinese operations. In mid-June, Chinese authorities officially accused Glaxo of bribing doctors to sell more of the company’s medicine. The company responded by launching an internal review, along with a promise to fully cooperate with the authorities. A month later, Chinese authorities had apprehended ten individuals in connection with the scandal, and GlaxoSmithKline International president Abbas Hossain admitted that “certain senior executives of GSK China [...] appear to have acted outside our processes and controls which breaches Chinese law.”

 

      

 

The story stands out for a few reasons. It’s an unsurprising illustration of how vulnerable China’s health system is to corruption. It is also an example of how serious the Xi administration appears to be about enforcing good corporate governance and fighting corruption, and of the risks for multinationals of expanding into China’s domestic market.

 

According to Chinese authorities, Glaxo is responsible for spending three billion CNY (about $500m USD) over the past three years on bribes to encourage doctors and hospital administrators to sell more Glaxo-made drugs to patients. Often, the incentives were funneled through travel agencies, who would send doctors on international trips and provide them with luxuries. Other times payments were made in cash, and at least one Glaxo employee allegedly entered doctors’ offices “to meet their sexual desires,” according to Xinhua, China’s state news service.

 

A crooked history

 

Three factors enabled the Glaxo scandal. Two of these are fairly specific to GlaxoSmithKline. First, the company has a history of greasing physician’s palms in order to raise sales. Despite being one of the world’s largest drug companies, Glaxo’s corporate reputation was sullied well before the most recent scandal. Last year, Glaxo was fined a record $3bn for bad practices in the United States, where the company offered psychiatrists incentives to prescribe the anti-depressant drug Paxil to children, despite the fact that at that time, Paxil was only approved for adult use by America’s Food and Drug Administration.

 

Second, the company’s profit goals in China were over-ambitious: one of Glaxo’s local Chinese sales representatives claimed that the company had set a goal of increasing sales in China by 30% over two years ­– a goal that may have been impossible to obtain without some backdoor dealings. The company invested in expanding its Chinese sales staff to over 4,000 employees, and saw profits rise an impressive 20% last year. While sales were increasing on paper, however, senior executives in the U.K. had little motivation to inquire too much into the activities of their Chinese employees and even if they had they may have been told that the issue was simply an example of the importance of guanxi, or the Chinese culture of personal connections, gifts, and favours that permeates the nation’s economy and politics. Often the line between business-as-usual and illegal backroom dealing can be ill-defined or seemingly nonexistent, especially between executives in Europe or America and their local Chinese managers.

 

Glaxo’s eventual fall made a mockery of the company’s own system of internal checks and balances. Mere days before Hossain’s admission of Glaxo’s guilt, the company claimed it had conducted its own investigation and “found no evidence of bribery or corruption of doctors.” The complete reversal shortly afterward was a moment of unprecedented humiliation, even for a company with a record of ignoring the law. That a multinational corporation could be so swiftly brought to its knees by the Chinese government is a stern and intentional warning from the Xi administration to those who would capitalize too readily on the often-chaotic conditions of China’s domestic markets.

 

China’s broken health system

 

The final factor in understanding why the Glaxo scandal happened is the vulnerability of China’s health system to bribery. Be it from large pharmaceutical companies or from individuals, the semi-private national health system relies on backdoor enticements and tainted money. Doctors and nurses simply aren’t paid enough, and hospitals are routinely underfunded. As a result, families of sick individuals often have to pay hongbao, or red gift envelopes full of cash, to ensure that their relatives receive adequate care.

 

Such conditions were ripe for abuse from GlaxoSmithKline’s opportunistic sales teams, who worked through many channels to encourage doctors to prescribe more Glaxo-brand drugs. For a well-trained but poorly paid Chinese doctor, an international trip, or a lump sum of cash were welcome lifestyle enhancements in return for the relatively low effort and risk of prescribing more Glaxo medicine.

 

A propaganda coup for the government

 

The decision of the Chinese government to act against Glaxo is likely motivated by a desire to make a strategic example of an international pharma company in China. A subsequent inquiry into other big pharma companies, including Roche and AstraZeneca, has led to the quiet cancellation of medical conferences in China. In particular, AZ was linked to the same Shanghai-based travel agency, and one of their employees taken into custody for questioning. It may be that rather than punishing the whole pack, the government has chosen to make an example of Glaxo as a warning to the others.

 

Both the state-run domestic press and international media organizations have followed the story of Glaxo’s wrongdoing with avid interest. The narrative has been almost entirely in favour of the Xi administration: a big international company is caught breaking the rules at the expense of China’s population.

 

Domestically, the new government polishes its image, both as an administration dedicated to improving the health care system, and as a defender of the Chinese people against avaricious foreigners. China’s population is ageing, and consuming growing amounts of Western medicines. The cost of pharmaceuticals seriously limits the access of average Chinese citizens to effective medical care, and breaking up GlaxoSmithKline’s scheme will deter other companies from doing similar things in the future, but will probably have little overall effect on the nation’s deficient health system.

 

Internationally, the narrative helps define Xi as a leader who is committed to fair, rules-based markets, reflected in a sternly worded Xinhua article that accused Glaxo of “disrupting market order.” It may damage investor confidence in the short term as Glaxo is put through the wringer for its kickback scheme, but it also may advertise the government’s commitment to make business in domestic markets more regulated and predictable.

 

At best, however, punishing Glaxo is a symbolic move. As some commentators have pointed out, the biggest corporate offenders in China are Chinese companies themselves. The “melamine-milk” scandal of 2008, when a toxic mineral in domestically produced baby milk poisoned hundreds of thousands of small children, stands out in recent memory as an example of China’s gross lack of responsible corporate governance. And while hospital administrators were jailed in a separate recent government inquiry into pharmaceutical kickbacks, the domestic suppliers of drugs involved appeared immune to punishment. But symbolic actions play an important role in China’s government, and hopefully the Xi administration will try to bring more of the domestic economy under the umbrella of consistent regulation.

 

A warning to multinationals

 

The Glaxo case illustrates the danger of reckless expansion in the Chinese domestic market. Even firms with better corporate reputations than GlaxoSmithKline should take heed: entering the Chinese market without watertight checks-and-balances and well-defined rules for dealing with guanxi and the local ‘cost of doing business’ may result in distasteful situations. As corruption specialist Peter J. Henning pointed out in the New York Times, the handling of white-collar crime in China is brutal compared to the kid-glove treatment that the U.K.’s Serious Fraud Office or the U.S. Justice Department uses in its investigations. Long periods of detainment or limited movement are routine, as a few of Glaxo’s American and British employees in China are now discovering. Companies who want to reap the rewards of expanding in China’s fertile domestic market would do well to take heed of Glaxo’s costly mistakes.

 

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