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

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

 


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

 

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.

 

Jiang Zemin and the end of ex-presidenti...

Jiang Zemin and the end of ex-presidential influence.

In comparison with their Western counterparts, China’s former leaders have tended to retain a far more significant influence over politics after their departure from office. With a culture that values the wisdom and experience of the elderly, and a political system in which decisions are made behind closed doors, there has been plenty of room for China’s ex-leaders to flex their political muscles long after their formal retirements.

 

 

In post-1978 China, Deng Xiaoping and Jiang Zemin have both exercised their roles as patrons, elder advisors, and kingmakers in Party politics after officially leaving office. Five out of the six new members of the Politburo Standing Committee (PSC), China’s ruling cabinet of ministers, including the President, are considered to be close to former President Jiang Zemin.

 

Jiang Zemin (President from 1989 to 2003, although subordinate to Deng Xiaoping until 1995) and Hu Jintao (President from 2003 to 2013) continued to lead China along the path of market-driven economic growth that was set by Deng Xiaoping (‘Paramount Leader’ from 1978 to 1995). Besides that, however, Jiang and Hu are political rivals associated with different factions of the Communist Party, and their administrations prioritized considerably different objectives. Conservative on political questions and neoliberal on economic ones, the emphasis of Jiang’s tenure in power was market-oriented economic reform within the strict bounds of the Party’s political leadership. The crowning achievement of Jiang’s administration was China’s entrance into the World Trade Organization in 2001.

 

The Hu/Wen administration rejected the Washington consensus and tried to focus on narrowing China’s yawning income gap, a goal that ultimately proved impossible for them. Hu also tried to foment intra-party democracy and develop formal decision-making processes for the CPC, an initiative that met with mixed success. Furthermore, despite the Premier’s lofty words, Hu maintained the political status quo of the post-1989 era, in which the Party’s control over society and politics remains unquestioned.

 

Today, each man is associated with a faction – Jiang with the politically conservative, elitist faction that includes most members of the current PSC, and Hu with a more populist group composed of cadres who rose up through the Communist Youth League, including current Premier Li Keqiang. The factions are characteristic of the post-Deng Xiaoping political environment, in which the Party is no longer subject to the will of a supreme leader like Deng or Mao, and is instead subject to the influence of many different elite cadres. Members of each faction are very loosely defined by background – the populist group is filled with cadres from poorer families who often held posts in the inland provinces, while the elitist faction is populated by those who grow up middle-class or wealthy, and who took positions in the coastal provinces. Although he now leads the elitist faction, Xi strove to be the compromise candidate during his rise through party ranks, guarding his opinions on critical issues and striving not to alienate the populists.

 

In recent National Congresses, there has been a general consensus that each faction should be well represented in the composition of the Politburo Standing Committee. Last November, however, six of the appointed PSC members are identified with Jiang’s elitist faction. The former leader, retired from office for the last nine years, appeared to have returned to the political scene as a kingmaker. Xi was long been considered Jiang’s protégé, and appeared eager to press on with the economic reform that many Party cadres felt stalled under Hu.

 

To many pundits, the defeat of the populist faction in November came at the expense of future reform. Two of the Party’s best and brightest reform-minded members of the populist faction, Wang Yang and Li Yuanchao, were not elevated to the Standing Committee, despite showing obvious talent and meeting the age requirements. Many observers reported that China seems burdened with a very conservative PSC for the next five years (at which point most PSC positions, save that of Xi and Li Keqiang, will be shuffled).

 

But then, in January of this year, came what many China watchers interpret as a gesture of deference from Jiang to the new leader, and a decision to step out of the limelight, Jiang’s name appeared at the end of a list of important dignitaries who visited a deceased general in a document of commemoration issued by the CPC. Normally, Jiang’s name would be placed third after that of Xi and Jiang’s successor, Hu. Such signs in China are always deliberate. What is unclear is whether Jiang chose to send such a signal, or if other powers, such as Xi or Hu, forced him to do so. Jiang was widely criticized for not giving up the Presidential powers fully in 2002, when he decided to remain Chairman of the Central Military Commission for an additional two years. Perhaps Hu’s swift and total handover of power to Xi, a reflection of his desire to see best practices institutionalized in the CPC, helped nudge Jiang into a full retirement.

 

Of course, it is also likely that Jiang himself, already at the ripe old age of 86 years old, had planned to install allies in the new PSC and then retire from politics permanently. Regardless, it seems that we will be unlikely to see Jiang directly influencing policy in Zhongnanhai, the elite Party compound in Beijing, in the years to come, as he did under Hu. For his own part, Hu was sidelined by his rival at the 13th National Congress, and probably wouldn’t have had much appetite for further political meddling anyhow. So it seems that the tradition of hanging around after the end of one’s Presidential term is over with the most recent power transition.

 

That is better for Xi as a leader, and for China in general. Jiang’s new, ‘real’ retirement also bodes well for the future of political reform, as of all the recent Party elites, Jiang was most opposed to opening up China’s politics. While we know that Xi shares, in his own fashion, Jiang’s zeal for reforming China’s economy, we have little idea as yet how Xi will approach the political questions. So far, the administration has focused on taming corruption, a very necessary and non-partisan initiative, as part of its goal of bringing the party closer to the people.

 

But Xi has many years of rule ahead, and most of his fellow members of the PSC will be replaced in five years’ time. China needs some meaningful reform beyond merely punishing corrupt party members if it is truly to develop a more stable and sustainable economy and society. Moreover, while Hu failed in his goal of addressing the income gap, Xi can hardly afford to: China’s Gini coefficient (a measure of income inequality that ranges between 0 for perfect equality and 1 for total inequality) has risen to over 0.6. America’s Gini coefficient, still very high in global comparison, is under 0.5. A Gini coefficient of above 4.0 is often posited as a sign of future social unrest. Perhaps the fact that Jiang is not going to be around to exert his influence will allow the new President to focus on addressing these issues, rather than worrying about political intrigue.

Heartbreak and disappointment: China...

Heartbreak and disappointment: China’s persistent football frustration.

In sports, China has distinguished itself on the global stage, taking advantage of a naturally vast talent pool with a large-scale state-sponsored training program that takes in children as young as five years old, and hones them into world-class Olympic athletes. Individual sports are where China does best in the medal standings, dominating the world in table tennis, shooting, diving, gymnastics, weightlifting, and badminton.



In ball team sports, however, China is not so successful on the international stage. Nowhere is this more obvious than football, the most popular sport both in China and the world at large. Currently, China’s men’s football team is 100th in the global FIFA ranking, having at best achieved 37th place some 17 years ago. The decrepitude of the team’s morale and performance was brought into a harsh light recently, as it lost 1-2 to Uzbekistan on June 6th, then 0-2 to Holland on the 11th, and, in the most heart-wrenching match for China fans, a dismal 1-5 against Thailand.

The Thai match was the catalyst for a new round of scrambling to rectify this persistent crack in China’s pride and national image. The Chinese Football Association (CFA) dutifully published a shame-faced press release, in which it said the Association “accepts this criticism from the masses and its leaders and will work hard to rectify [its problems].” The national team’s Spanish coach, Jose Antonio Camacho, was fired with a severance package of over 50 million yuan. For all of Camacho’s experience as a footballer and manager, including a successful tenure as manager of the Spanish national team, he presided over a rapid decline in the Chinese team’s already poor match performance. The team is now looking for another foreign coach as it continues to try to reverse-engineer football success. Camacho was not the first coach to be fired, either: America’s Fox News refers to the national coaching position as a “poisoned chalice.”

     

After the humiliating loss to the Thais, football pundits posed the basic and most baffling question about China’s poor performance: why does a football-loving country with the world’s largest talent pool fair so poorly in international competition? China has been trying to rectify the situation by importing help – Camacho is the seventh foreign coach – but so far, that hasn’t been sufficient to address the nation’s football problem. Dumping state money on the sport hasn’t produced the desired results yet, leading most to suggest that there is no easy answer: the problems that dog Chinese football are symptomatic of those that affect the nation at large.

Staying home to study

At the grassroots level, the main obstacle to developing a productive and successful football culture is the effect of the one-child policy, which sharpens Chinese parents’ already agonizing concern for their children’s success. A mere 200,000 children play on organized football teams at least three times per week in China, an astoundingly small number that is kept low by parental emphasis on academic success, which devalues organized sports as merely another distraction. While Chinese families share the school-first attitude with their counterparts in Japan and South Korea, youth football in these countries benefits from a more balanced view of what makes a successful child, a better-developed youth sports infrastructure (particularly outside of government Olympic training centers), and the absence of a one-child policy. In Seoul or Tokyo, a child is far more likely to become a professional player through regular sports associations, while in China, the only acceptable route to success through sport, in the eyes of parents, is provided by direct government sponsorship and support.

Football in the dock

But the most important factor in China’s football failure is the corruption that has infected the CFA. Unlike most countries’ national associations, the CFA wields deep influence over clubs and, illicitly, even the outcomes of football matches. On July 8th, former CFA vice-chairman Nan Yong stood on trial in Liaoning province on seventeen separate counts of bribery, for a total of nearly 1.5 million Yuan. Many other officials from the CFA, in addition to referees and players, have been on trial since last December, leading Caixin Online to comment that Chinese football itself “is in the dock.”

CFA-approved match fixing has become so prevalent that nearly all the referees in China’s Super League knew about it, according to Huang Junje, a referee now on trial for corruption. It has become an unmistakable reality for China’s fans, too, who even nicknamed one prominent referee “the Golden Whistle.” Huang also pointed out a telling difference in the professional culture of football in China, complaining that “in Japan and South Korea, football leagues have nothing to do with associations.”

Profit and political maneuvering are the distorting forces behind China’s football corruption. Investing in clubs is often unprofitable in China, at least on paper, but savvy businessmen know that they can use a team’s success or failure to their companies’ advantage. Deals between business leaders and local officials, especially concerning real estate, can include the win or loss of a football match as an unwritten clause. The graft extends beyond the national level, according to Nan, who admitted that he sold positions on China’s national team in 2002 for 100,000 Yuan apiece. Ironically, 2002 was the only time China has ever qualified for the World Cup finals.

As long as China’s national football teams are used as pawns in China’s political and economic power structure, where backroom deals between politicians and investors are the order of the day, the country’s leagues won’t be producing much of value for China’s national squad, and fans will continue to be disappointed by the poor performance that results from match fixing.

A false cure

            The steady trickle of European soccer stars into China is a predictably failed tactic in the struggle to improve the Super League. Most notably, former Chelsea star striker and captain of the Ivorian national team, Didier Drogba, left Shanghai Shenhua FC early in 2013 after serving just six months out of his two-year contract. Despite the generous terms of his contract (a reported 270,000£ per week), it’s hard not to feel bad for Drogba. At the start of his tenure last summer, Shenhua was languishing near the bottom of the Super League, suffering from conflict at the boardroom level, a mostly-mediocre side, and the detrimental antics of erratic billionaire owner Zhu Jun.

            Despite his awful soccer skills, Zhu is occasionally inclined to join the Shenhua squad on the pitch, as he did during a 2007 game against Liverpool F.C. His megalomaniacal management style, and his determination to use Shenhua as a pawn in his business deals seems to be his team’s undoing. Lately, Zhu’s modus operandi has been to attract foreign talent with promises of vast wages and then find ways of disposing of them while withholding most of their pay. It was no different for Drogba and Nicholas Anelka, another former Chelsea star at Shenhua, who walked out at the same time over unpaid wages and conflict with management.

Poor prospects

Xi Jinping, China’s President, is a “well-known football fan” according to Global times, and is interested in improving the country’s national team. But the ways China has attempted to fix the sport’s graft problem – cracking down on CFA officials who are, at the end of the day, merely caught up in the country’s larger power structure of capital and political power, and engaging foreign celebrity coaches and advisors – clearly won’t address the underlying issues. Is it possible for China to develop a successful, winning football culture without the political underpinnings of separation of powers, business regulation, and consistent rule of law? Depressingly, many fans seem be as pessimistic about the state of football as dissidents are about the pace of political reform. In the public preview of a new documentary in development about the national team, 11 in 1.3 Billion, the filmmaker asks football fans if China could ever win the World Cup. “Not in 50 years!” they shout in response, or “not in this century!”

Meanwhile, Chinese parents continue to prefer that their children spend the half-dozen hours per week during which they could be playing on an organized football team, on extra studying. Pity China’s long-suffering fans, because the combination of low participation among youth and persistent corruption makes a dim outlook for Chinese football.

Economic Restructuring: China’s GDP...

Economic Restructuring: China’s GDP growing at the slowest rate since 1999.

 

China appears to have entered a period of economic slowdown, characterized by weakening growth in both the country’s services and manufacturing sectors. Last month, China's semi-official PMI -- a measure of the health of the manufacturing sector -- was 50.1, signalling that that industry as a whole is dangerously close to contracting. The production sub-index was 52, indicating output barely grew in June. At the same time banks were subjected a surprisingly severe credit crunch, as China’s new government, in office since March, seeks to assert itself economically by tightening the nation’s easy credit environment. Although the credit crunch exacerbated an already worsening economic picture, the national administration and central bank believe it will help foster more sustainable growth.

 

The slowdown is emblematic of the problems China is facing with its current economic model, which is unbalanced in favour of investment over private consumption, a fact that is finally being reflected in GDP growth. China’s target growth rate for this year is around 7.5%, lower than the actual growth rate experienced each year since 1999. Normally, the annual government target is a low-balled figure, a minimum that should be exceeded. In 2012, for example, the target growth rate was also set at 7.5%, but the actual growth rate ended up being 7.8%. This year, however, it remains unclear whether China will even manage to achieve its target, a possibility that has attracted the world’s concern. While America continues to enjoy moderate overall growth, and Europe struggles on through its own financial woes, China is now downshifting dramatically, having provided years of essential support to world growth following the global financial crisis.

 

Indeed, the very stimulus programs that allowed China to recover so quickly from the global recession also contributed to a reckless credit environment, inviting the government to intervene. Premier Li Keqiang, second-in-command to President Xi Jinping, and the one in charge of implementing government policy, wants to now teach the banking sector a lesson, so that financial restructuring can produce more sustainable long-term growth. In particular, the government has cracked down on shadow banking, or financial activity that is practiced outside of the regulatory environment, both by established banks and by non-bank financial services companies. Such practices can be beneficial by developing innovative new financial products, but the lack of regulation makes the shadow banking sector a breeding ground for reckless lending.

 


Source: NYT

 

China’s leaders are concerned that such risky practices are fomenting systemic risk, and that easy credit may lead to an American-style financial crisis. In the past, such lending has helped the government to match and exceed GDP targets by producing unsustainable goods, in particular excessive real estate. Most alarmingly, an increasing number of loans have gone towards paying off preexisting debts..

 

The shadow banking crackdown created a credit crunch in mid-June, a time when liquidity was low due to companies paying taxes, and customers withdrawing money in advance of the annual Dragon Boat Festival. It was a startling moment for those who follow China’s economy, as the seven-day repurchase rate for securities –a measure of the cost of lending in the interbank market– shot up to an incredible 25%. In more developed financial systems, such an indicator would be symptomatic of a severe system-wide shock, but in China, where liquidity is injected on a more ad hoc basis, it was more of a wake-up call than a panic alarm. The People’s Bank of China (PBOC) eventually relented, and released some liquidity to bring rates back down and revive interbank lending. But the message from Premier Li and the PBOC to China’s banks was clear: be more cautious about lending, or suffer the consequences.

 

China’s recent credit crunch is representative of Premier Li’s new conservative direction in financial policy, and for the most part, global investors have reacted with hesitant approval. British bank Barclay’s has hailed what they call the “three pillars of Likonomics:” avoiding stimulus, deleveraging, and structural reform. “We think that economists and policymakers have reached a consensus that China should now tolerate slower growth and focus on structural reforms,” wrote Barclay’s on June 3, estimating that with the necessary reform, China’s economy can continue growing at around 6% to 8% for the next decade.

 

Others are much more pessimistic about China’s longer-term economic picture. Michael Pettis, a professor of finance at Peking University and a Senior Associate at the Carnegie Endowment for Peace, is a well-known China skeptic. Famously, Pettis has forecast a comparatively abysmal average GDP growth rate of 3% for the country in the next decade, far below the 7% range forecast by the Xi/Li government and Barclay’s.

 

According to Pettis, China has become addicted to investment, which he believes is subject to the law of diminishing returns: the initial slew of investment drove GDP growth with projects of long-term viability, but over time, maintaining or increasing the same high rate of investment has created fewer and fewer sound proposals, so while nominal growth remains high, in reality, recent years of economic expansion have produced less and less real value for China.

 

On a real-world level, Pettis cites two major problems with China’s economic model. The first is its state-led western expansion, which relies on government infrastructure projects to lure China’s wealthier easterners into the nation’s central and western provinces. When infrastructure expansion slows, as it inevitably must to correct China’s investment addiction, provinces like Tibet, Guizhou and Shaanxi will see an economic contraction as the easterners find little reason to remain there. The second issue is China’s dramatic environmental degradation, which Pettis believes subtracts about 3.5% from China’s stated annual GDP growth, a figure that fails to take into account the health and economic effects of widespread pollution.

 

For Pettis, the best prescription for China’s economic ills is to increase household income, thus stimulating the domestic-consumption economy and allowing the investment rate to fall. China’s wages have not increased in line with its productivity over the last 20 years, a problem compounded by the low renminbi, which acts as a tax on imports. By allowing the currency to gain value and workers to earn more money, Pettis believes, China could successfully launch its economy into a new phase without suffering an economic crash.

 

The Rest of the World

 

The world’s financial institutions have significantly lowered their GDP growth expectations for China this year, a situation that is looking more and more threatening to slowly recovering America and the struggling E.U.. In this sense, the June credit crunch has been an important wake-up call to policymakers and companies in the West: China’s days of GDP growth over 10%, or even 7.5%, are over.

 

Whether or not Pettis’ 3% to 4% figure for annual growth is accurate, the fact that China needs to make some potentially painful reforms is indisputable. Premier Li has stressed the overall goal of reducing the state’s role in the Chinese economy, and Chinese policymakers have vowed to take action to boost domestic consumption, moving the country to a more sustainable development path that is less reliant on investment. In most of its reform efforts, the government will have to face down strong vested interests in the Party and in the business world that want to maintain the present environment of easy investment and credit.

 

If last month’s credit crunch is any indicator, given the choice between suffering the results of a necessary reform, and foregoing reform altogether, the Xi/Li administration seems comfortable with creating a bit of pain and discomfort. The Hu Jintao/Wen Jiabao government of 2002-2012 lacked this boldness, leading some to label those years as a “lost decade of reform.”

 

China’s new leaders will have to act with both quickly and cautiously as they make up for lost time while balancing the pace of reforms according to the country’s capacity for change. The lesson of the Perestroika-era Soviet Union – that hasty economic and political reform can destroy a nation’s political structure – is an ever-present warning to the Communist Party. But the country cannot afford another decade of hesitancy. And as far as investors are concerned, given the example of last month’s credit crunch, it seems likely that we can expect more economic shocks on the difficult road ahead.

 

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