Editorials

The expansion of Chinese wealth and the middle class has led to an incredible demand for luxury goods- clothing brands, accessories, automobiles, and more recently artwork. There have also been the more unusual status symbols such as the fad of the $1.5 million Tibetan Mastiff as a household pet. However, there are few industries that have managed to create a status symbol in China that is exportable internationally. One of these significant, and perhaps surprising, products is the piano. As an exception to the stereotypically low-value added international exports, China is now the largest producer and consumer of pianos. Many international brands are producing their pianos in China as well as one of China’s own homegrown brands becoming the largest exporter in the world. A large, expensive item often prominently on display in wealthy homes in the West, the piano is both an instrument and piece of art, and now being eyed by an expanding Chinese middle class as an increasingly desirable, and attainable, home item.

Increased disposable income is a widespread phenomenon in China as urban households with an annual earned income between US$9,000 to US$34,000 rose from just 4% in 2000 to about 66% in 2012 and are projected to hit 75% by 2020, according to McKinsey consulting group. Sales trends over the past few years indicate that Chinese consumers are increasingly spending money on household decoration and personal enjoyment, contributing to the increased interest in pianos. Additionally, pianos are considered an attractive item because, unlike a Rolex or Louis Vuitton bag, they also require a large living space- a pricey commodity now in major Chinese cities- adding an additional element of prestige to the purchase.

The desire to showcase this purchase as a status symbol can be seen in the purchasing statistics. In Europe, only about 40% of Steinway grand pianos are bought for amateur player use. The majority are used in concert halls or music schools due to their size and the impracticality of fitting one into the average living room. However, in China this number is over 65% with a larger segment of the purchasing population wanting it as part of their home decoration.

In addition to being a decorative addition to an upper class home, the piano has long been considered a possible route to success by Chinese parents. Many parents feel that this is a potential step up in an extremely competitive university environment in big cities like Beijing. Talented young musicians can receive coveted extra points on the Chinese university entrance exam or have the alternative route of a music conservatory instead of having to compete for a spot at Tsinghua or Peking University.

Now, as more and more Chinese couples are allowed to have a second child, an expensive instrument in the home is an even better investment. In fact, in the first week after the announcement of the relaxed One Child Policy a few months ago, along with a rise in stock prices for companies making diapers and baby formula, piano manufacturing companies’ stock rose ten percent (with these changing prices clearly in response to the new law, evidenced by the drop in stocks for condom maker Humanwell Healthcare Group). These types of products, affected by the expected increase in birthrate have been named “second-child concept stock” and have seen a temporary boom in the market.

The Chinese piano industry is experiencing a rise in production and consumption as this sector declines in many countries around the world. Since 2008, the traditional piano markets of the US, Europe, and Japan have been negatively impacted by the financial crisis and falling birth rates. In Europe, the number of piano manufacturers declined over the past century from more than 300 to only nine. Meanwhile, China has more than 100 piano makers, now producing nearly 80% of the global total. Its market is also largely supporting international brands. Steinway has seen decreasing sales in Europe and US for years, but has been growing in China every year since 2005.

Low production costs in China have drawn many famous international piano brands to China, at least for production of their lower-end models. However, Chinese brands are also building more of a name for themselves, attempting to give “Made in China” less of a stigma to global consumers. Pearl River Piano and Hailun Company, the two largest piano manufacturers in China, are both listed on the Shenzhen stock exchange. The former is now the largest piano manufacturer in the world and holds 20% of the domestic market. It is the fastest growing piano manufacturer in the US and Canada with over 300 dealers in addition to exporting to over 80 countries.

Pearl River Piano may also provide a business model for other high-value added manufacturing companies to consider when exporting abroad. It was the first Chinese company to use its own brand name, rather than simply producing cheap models under a Western brand name. In order to adjust to the market, the company used international sales representatives to raise awareness about the brand, pushing their pianos into over 1,000 American outlets where consumers can try it out for themselves.

As Chinese salaries remain on the rise, and the concern for children’s education certainly doesn’t seem to be relaxing, the increasing interest in an expensive musical instrument makes sense. Traditional piano markets, now unable or unwilling to absorb the prices of traditional brands, are giving Chinese manufacturers a chance that they have not had in many other expensive items, such as automobiles. This may represent a unique and fortunate opportunity for a Chinese industry in a step up the manufacturing chain in international exports as well as stiffer competition for future conservatory applicants.

The rivalry between China’s two largest cities has been ongoing for decades. In the view of many people, Beijing is traditional and culture-oriented, whereas Shanghai is a modern, cosmopolitan city, with a strong focus on business. Over the next decade both are keen to be foremost in the minds of the Global Population, but for very different reasons.

The recently released Global Cities Index 2014 by A. T. Kearney placed Beijing and Shanghai at 8^th and 18^th place respectively for most globalized city. This news was received with mild surprise, especially in Shanghai, as it contradicts the stereotype of many within China that Shanghai is the Mainland’s most international city and thwarts the city on this point of pride. Nevertheless, the question remains: has Beijing ousted Shanghai from its traditional position - the most outward-looking city in Mainland China? Is Beijing not only holding the monopoly over the political power, but also in the commercial sphere?

The Global City Index is based on five factors: business activity, human capital, information exchange, cultural experience and political engagement. Interestingly, what propelled Beijing into the Top 10 for the first time was not political engagement or cultural experience, but the increase in broadband subscribers, museums, international schools and most importantly - business activity. With the rise of Chinese companies, the level of enterprise activity has reached that of New York, Paris or Tokyo. Out of 89 Chinese companies on Forbes Fortune Global 500 list, 48 are headquartered in Beijing whilst only 8 are from Shanghai.

Although these companies are vital to the city’s economy, employing around 25% of the cities population and accounting for 60% of the city’s tax revenue, they do little to really make Beijing more global. Rapid expansion and increasing international importance of the country’s SOEs and private companies cannot be denied, but in reality the majority of these corporations are focused on the domestic market and often do not have a presence outside the country.

Shanghai conversely beat Beijing in the human capital sphere, as it has a larger foreign-born population. Unofficial statistics put the number of foreigners in Shanghai and Beijing at approximately 300 thousand and 200 thousand respectively. Moreover, Shanghai has been the top destination of FDI in China for years, and landed the 6^thplace on the Xinhua-Dow Jones International Financial Centers Development Index, successfully leaving Beijing behind in both measurements. In addition, Shanghai is the world’s busiest port by cargo tonnage and container traffic.

Shanghai’s internationalization started nearly 200 years ago, giving it an early lead over Beijing when China was forced to open the city to foreign trade. This was later augmented by the opening of British, French and American concessions. In the 1930’s, Shanghai was a bustling, cosmopolitan and quickly developing city, “The Paris of the East”, with an ever-expanding foreign population. However after the revolution the spotlight was turned to Beijing as the focus of China's political and cultural power.

Even the cities’ spirits reflect the traditional roles they have played in the past. A stroll in a Beijing hutong will provide scenes more likely to appear in tightly-knit rural communities, whereas central Shanghai is a jungle of steel, concrete and glass, packed with the offices of international corporations.

A Norwegian student living in Shanghai, previously residing in Beijing, mentioned Beijing is still the epitome of traditional China for her. However, Shanghai is a bustling city with opportunities one could only dream of (in Beijing). The capital, in her opinion, sometimes feels as if it never expected to be a huge global city. According to her, people in Shanghai are more money-oriented and just love the coolness of the city. The city will never be satisfied with what it has and will constantly try to improve and modernise itself.

Shanghai is now taking the next step in its development with the recently established Shanghai Free Trade Zone. Regarded as China’s most significant attempt at deeper economic liberalization since Deng Xiaoping’s era, the FTZ will give foreign companies a lot more freedom and space to develop business operations not permitted elsewhere in the country.

The zone was launched last year amid lingering uncertainties, but there are plans to lift remaining currency trading restrictions, allow duty-free imports and open some of the industries for both full foreign ownership and general operations (Microsoft and Sony are both planning to launch their Xbox and Play Station consoles here). If the project succeeds, it will be a major boost for the city’s economy and internationalization, since even more foreign companies, especially in the financial sector, will choose the city as their gateway to China.

Beijing, on the contrary, has its own development plans, revolving around more integration with Tianjin and Hebei province as a whole. Due to air pollution, population density and the lack of economic development in the latter, the central and local governments are mulling over the concept of combining Beijing, Tianjin and Hebei province in certain respects. Although the full plan has yet to been unveiled, and speculations prevail, the Capital will probably see some of its industries and educational institutions being reallocated to the surrounding areas.

All in all, both cities are important global metropolises. China’s continuing rise and increased importance will continue to attract people and companies from around the world to both of them. However, Shanghai should remain the most cosmopolitan and international city in Mainland Chinais evolving at an almost unprecedented rate, it has a larger international population, greater FDI, a higher number of foreign companies and one of the largest container ports in the world. Furthermore, the Free Trade Zone will only deepen the city’s status as forward looking. Meanwhile Beijing, will continue to attract those looking for a deeper connection to the roots of Chinese power, international businesses seeking synergies with SOEs and those involved with China's burgeoning tech & telecoms entrepreneurs.

As China becomes a major global aid donor, it offers a new structure and method of aid dispersal different than that of major, Western aid donors. Beijing has attempted to maintain South-South relations with aid-receiving nations, concentrating on specific projects that both countries can benefit from. The difference initially stems from disparate priorities when dispersing aid:

These priorities were decided by Zhou Enlai in 1964 and have continued to be the basis for Chinese aid decisions to the present. Together they form the modern policy of treating aid-receiving nations as business partners rather than aid recipients, staying out of foreign nations’ domestic politics, and using infrastructure as a route to development (while also providing a return for China).

The Organization for Economic Co-operation and Development (OECD) defines aid as:

China however is not a member of OECD and therefore has its own definition including investments that most aid-donor nations do not include. A large portion of Chinese financing is categorized by OECD countries as development finance, but not aid. For example, Chinese banks provide low-interest loans that other nations are not willing to offer. However, they then make a profit off of the interest, and use this money for development projects which employ Chinese workers using Chinese goods.

These differences in aid outlook highlight Beijing’s choice to identify with developing, rather than developed nations in many economic matters. Indeed, “China is a developing country” was the opening line of China’s first (and thus far, only) White Paper on foreign aid, released in 2011. This attitude has in some ways allowed Beijing to more effectively address immediate needs in local communities of aid-receiving nations. Additionally, Beijing does not attempt to affect foreign nations’ political structure and does not try to teach developing nations the “correct” way to run a country as traditional donor nations often have- an attitude which is sometimes unhappily received.

However, Chinese projects have also been met with criticism. Quality has been a problematic issue in some overseas Chinese projects, as well as the ratio of return for the local community. Because China often uses its own workers, the local community may end up with a new piece of important infrastructure, but this investment has done little for local unemployment or technological skill and these communities are now in debt. OECD countries, when loaning money to aid-recipients, must make at least 25% of the money a grant, thereby reducing the debt burden on a developing nation. Beijing, however, does not follow this rule. There is some concern among long-term donor countries that heavy investments allowed by Beijing will undo relief programs that have attempted to remove this burden from developing nations drowning in debt. Lastly, it is hard to say whether the long-term affects of China’s reluctance to tie political conditions to aid will be beneficial or harmful to developing countries’ overall advancement.

China’s aid is mainly provided by large loans from China’s Export-Import Bank, the China Development Bank (CDB), and the China Africa Development Fund (within the CDB). Other major aid contributors include several state-owned enterprises, including China’s National Overseas Oil Company, the China National Petroleum Corporation, and the China Petrochemical Company, which provide technical and financial support. The structure is overseen by the Ministry of Commerce, with consultation with the Ministries of Foreign Affairs and Finance, and ultimately reports to the Standing Committee of the Communist Party’s Political Bureau.

These are the eight types of aid that Chines provides, funded in three ways: grants and interest free loans are provided through state finances while concessional loans are administered through China Export-Import (EXIM) Bank.

Because of the vast differences in calculations and Beijing’s lack of transparency regarding aid figures, it is very difficult to say how much foreign aid China provides. Following the release of the 2011 White Paper on Chinese Aid, the RAND corporation estimated it at nearly $190 billion for 2011, while other experts have said according to Western models of aid, it would only come to about $10 billion- obviously a huge discrepency, indicating that a large portion of China’s “aid” is in projects that other nations would classify otherwise due to their low ratio of grants to loans.

According to Beijing’s own reporting, about 80% of China’s foreign aid goes to Asian and African countries. It is unsurprising that China would invest heavily in its own region, and there are plenty of Asian nations that can use the aid for their economic development. Recent aid package offers to Pacific island nations have caused some concern to Australia, historically the major donor to these nations, highlighting the potential for aid to lead to political influence. As for its rapidly expanding investment and impact in Africa, (a phenomenon widely written about, and therefore not covered in-depth here) it’s clearly beneficial for China to have a significant stake in a region which can provide a huge number of development projects and potential profits as well as a large amount of the natural resources that China needs to continue to fuel its own growth.

Chinese foreign aid certainly presents a model significantly different from that of traditional aid-donor countries. As its economy continues to grow and requires new areas for investment, both China and aid-receiving countries can benefit from new projects. Chinese aid, particularly in Africa, is being viewed by many as a welcome supplement to Western models. However, there are few who would dispute that Chinese “aid” projects are intended largely to benefit China. It remains to be seen whether China has begun a new model for effective, practical development or is simply becoming the new leader in a long history of exploiters in Africa and the developing world.

As China’s prominence in the world grows, increasing numbers of international students are considering a first degree in China as a realistic option. Study abroad programs and joint degrees through Western universities are already very common. Doing a full Master’s degree in China has also been an increasingly normal phenomenon for international China scholars for many years, an idea made popular by the now-famous Hopkins Nanjing program. However, there has recently been an increase in the number of international students who are considering opting out of doing their main undergraduate study in their home country, but rather completing the full program in China, through renowned, international universities- and supply is beginning to follow demand.

There are still only a handful of Western universities who offer a full undergraduate degree at their own, independent campus in China. But, as the profitability of this possibility becomes apparent, new universities are jumping on the bandwagon each year. American universities currently have the largest number of such campuses, with UK and Australian universities making up the majority of the remainder.

 The Chinese response to these programs has been mixed. The government has been slow to approve the opening of schools with apparently some hesitation about how it will affect China’s own top tier schools. However, local response seems to be quite positive. The newest school highlighted in this article, NYU Shanghai, was offered the rent-free use of a 15-story building in a central location in the city to encourage its growth (in addition to the Shanghai government footing two thirds of the tuition bill for all Chinese students in the program). The large number of Chinese to international students in many of these programs also indicates the level of domestic interest in this new type of educational endeavor.

 These programs claim to integrate Western and Eastern teaching styles into a unique learning environment. NYU Shanghai evaluates prospective Chinese students through a weekend-long process where professors can assess students’ global outlook and creativity, instead of just their gaokao score. Xi’an Jiaotong Liverpool University includes encouraging students to question teachers as one of their stated priorities. Its main mission as a university is creating students who will have “a happy life and a successful career”.

 However, there have been issues with foreign universities dealing with the Chinese university system and government in the past, and some of these problems are still evident in foreign campuses. Nottingham Ningbo, a Sino-British joint university, states that its available courses are decided based on “expertise available at Nottingham UK and the needs of China”. Some joint ventures in the past have met with complaints from foreign professors about censorship and plagiarism as well as educational rigor. Yale University ended its partnership with Peking University after a few years of a joint program because participation was too low. International language students complained that they could not successfully continue in Chinese language classes at Yale after returning from Peking University, even with the huge additional benefit of being immersed in the country for a semester, because the language classes in PKU were not sufficiently up to par with those at Yale. In a joint Master’s degree program myself, I was told by my foreign school’s administrators to expect to spend about three times as much time studying next year at the foreign university compared to this year at Peking University- China’s best university- due to the disparity in academic rigor. With these issues in mind, it remains to be seen if foreign universities will be capable of maintaining their high teaching standards on their Chinese campuses.

 The current quality of these programs is difficult to assess as many have only had a few years of graduating classes so far (or are even newer), and are not considered on most ranking charts as they are branches of a main university. The universities claim that teaching staff is held to the same high standards as the staff at the home campuses. As these are quite prestigious universities, however, it seems unlikely that the best professors would choose to research and teach at a lesser-known campus with fewer resources or opportunities. Additionally, as the percentage of non-native speaking students in the classroom will be much higher, and this may lower the overall level of academic caliber. Yet for students interested in an international experience, and particularly to improve their knowledge of China and their Mandarin, the Chinese campuses may more than compensate for some lack of educational rigor. Additionally, ultimately all students will have the same prestigious school name on their diploma, and often for a significantly cheaper cost.

 Below we outline the structure, advantages, and disadvantages of three internationally-renowned universities who now have full bachelor’s degree-granting campuses in China- New York University, University of Nottingham, and Liverpool University. At all three, classes are taught in English, and students receive a degree from both the Chinese and foreign university. Another up and coming project is Duke’s campus in Kunshan, scheduled to open next year. If these programs prove successful, increasing numbers of top international universities are likely to look toward China as a future investment.

New York University Shanghai

New York University has a degree-granting campus in Shanghai, which is now coming to the end of its first year of operation with 294 students who will graduate in 2017. It currently offers undergraduates a choice of seven broad majors covering humanities and sciences. NYU Shanghai is the first American university to receive independent registration status from China's Ministry of Education.

The NYU New York campus is consistently rated a top-50 school in the world. NYU also has a very successful campus in Abu Dhabi.

Admission:

In this first cohort of students, 51% were from the PRC and 49% from abroad (with 100 out of 145 of those from the US).

The admission rate of NYU New York is normally about 30-35% of applicants. Its campus in Abu Dhabi is one of the most competitive in the world, admitting fewer than 5% of applicants (making it more competitive than Harvard or Yale). For its first year, NYU Shanghai received about 6,000 applications (split approximately evenly between Chinese and foreign students), making its admission rate about 20%.

NYU Shanghai has a fairly unique admissions process in an attempt to combine Chinese and Western university admission processes. All students must submit their high school transcript, the NYU common application, a teacher evaluation, and essay. American students submit an SAT or ACT score while Chinese nationals submit their gaokao score. Chinese students are not required to take an English language proficiency test, but instead must attend a Candidates Weekend where they are evaluated through various exercises and discussions on their English, critical thinking skills, global outlook, and general fit for the program. International students must participate in an interview for admission.

Tuition:

Non-Chinese students pay the same tuition at the Shanghai campus as the New York campus. However, Chinese students pay considerably less at 100,000 RMB/year (about $16,000 USD). This is reportedly because the Shanghai government covers the remaining 2/3 of the tuition costs for Chinese students. This is in comparison to NYU New York where all students, domestic, in-state, and international pay the same tuition rate. On the other hand, the Chinese tuition is still considerably higher than that at the partnered East China Normal University, which is about 5,000 RMB ($800 USD) per year for undergraduates.

Educational experience:

All classes at NYU Shanghai are taught in English, with the opportunity for students to take Chinese classes (international students) and English classes (Chinese students). One obvious difference is the huge disparity in size of the campuses as the Shanghai campus has a few hundred students while New York has nearly 20,000. The New York campus therefore has many more opportunities and choices of subjects to study, but the Shanghai campus may allow for a more personal experience.

The living arrangements for NYU Shanghai are quite unique in that Chinese and international students live together, which is generally not allowed in Chinese universities. This can provide significantly more interaction between students and could be invaluable to international students in their immersion into Chinese language and culture. Currently, students are living on the campus of East China Normal University, with which NYU Shanghai has a partnership, until the expected completion of the Pudong campus in summer 2014.

University of Nottingham Ningbo China.

The University of Nottingham opened a degree-granting campus in Ningbo, China in 2006. In addition to this and its UK campus, it has a third campus in Malaysia.  The UK’s top employers in a survey from this year ranked its UK campus the most targeted university.

Nottingham Ningbo has an undergraduate student body of nearly 5,000 students with international students making up about 500 of the undergraduate population.  

Admissions: 

All students are considered for admissions based on their home country qualifications by GPA equivalents. All international students also submit a recommendation letter and personal statement. Chinese students are assessed on their gaokao exam. Students must have a First Division score to be eligible to study and a minimum score of 115 for English to enroll for a degree program, though most domestic Chinese students are expected to take the preliminary prep year.

Tuition/Costs:

One advantage for international students in this program is that they pay the same tuition price as domestic students. However, their housing is significantly more expensive. This is the opposite of the UK campus where all students would have the same housing options, but non-EU students pay significantly higher tuition.

 Educational experience:

Nottingham Ningbo has chosen to offer either a three of four-year program for its Undergraduate degree in China, with the extra first year being offered for those who need to improve their English. This is a positive requirement for international students in China, whose in-class experience is likely to be improved by this required extra year of English training for domestic Chinese students.

The Ningbo campus has quite a large undergraduate body, which allows for a significant number of choices of majors. However, of the nearly 5,000 undergraduate students, fewer than 600 are international students. Additionally, Chinese and international students are required to live separately. Therefore, non-Chinese students maybe feel somewhat isolated and less well-integrated into the campus.

Xi’an Jiantong Liverpool University.

XJTLU was founded in 2006 in Suzhou, making it the world’s first Sino-British university. It now offers an undergraduate program with about 7,000 students and 26 options of majors. Liverpool is ranked as a top 40 British university, and Xi’an Jiaotong as a top 10 Chinese university.

 Admissions:

XJTLU admissions for international students is unique in that there is no test required but rather students’ high school grades make up the majority of the decision, with letters of recommendation and a basic application also submitted. Foreign students who are not from native-English speaking countries must also take a standard English language test (TOEFL or IELTS). All Mainland Chinese students are evaluated on their gaokao scores, with First Tier as a requirement, but Cantonese students also must take a XJTLU aptitude test.

Tuition/Costs:

Chinese and international students’ tuition is roughly the same, but with some cheaper options for Chinese students depending on major choice. Housing for foreigners in this program is vastly more expensive than Chinese students as international students may only stay in university apartments while Chinese students are in dorms.

Educational experience:

Non-native English speakers at XJTLU are generally expected to take one to two years of preparatory English classes before beginning content classes. The program boasts an 80% foreign nationality of its professors. However, of over 7,000 undergraduate students, only about 100 are international students and they are housed separately. While this small percentage of foreigners may improve their language skills, it is difficult to imagine that this creates any real feeling of a British university.

It remains to be seen if 2014 really will be the year in which the Chinese authorities grapple with the country`s freewheeling financial system. The government`s current policy of kicking the can down the road means ever-larger piles of credit, slowing growth and the rising risk of financial crisis.

Some market participants thought the potential default at the end of January of a CNY 3 billion product sold by China Credit Trust would be the epiphany, in which investors learned the painful lesson of the risks involved in blindly ploughing funds into the shadow banking system. There were those who thought the collapse of a major institution might trigger a systemic reaction, forcing the government to take drastic action.

It turned out to be neither. The trust company, the bank which marketed the product, the local government and investors reached agreement where the principal and at least some of the product`s final-year interest payments were paid out. Moral hazard continues to rule the financial system.

This isn`t the first bullet the authorities have dodged. The actors in China`s financial system – the local government officials, regulators, issuers and lenders – are complicit in avoiding failure, even as lending has boomed. Chinese bank assets have more than doubled since the end of 2009 to CNY148 trillion (US$24.3 trillion), nearly three times last year's GDP. By comparison, U.S. commercial bank assets are just over $14 trillion, even though its economy is more than a third larger than China`s.

Bears see a crisis approaching.
For the growing number of China bears, the dramatic expansion of the financial system, coupled with its suspiciously low failure rate, is prime evidence of a brewing financial crisis. Government advisors acknowledge that the longer debt is allowed to grow, the greater the risk of a crisis and the greater that crisis could be.

For a central bank staring down the barrels of a financial crisis, however, the People`s Bank of China doesn`t sound overly concerned. Large chunks of its latest monetary policy report are devoted to explaining the rise of shadow banking, including the kinds of activities pursued by China Trust, and warn of more market volatility to come. Market participants will "need to tolerate reasonable money rate volatility," the PBOC said in the report released last weekend.

The pressure to make profits in the face of regulatory curbs on traditional lending has pushed overstretched banks to borrow short and lend long, making them more sensitive to changes in liquidity availability, the PBOC explained. Meanwhile, the growth of bank assets and "off-balance sheet innovations" are eating up increasing amounts of liquidity, and this explains periodic bouts of tight liquidity despite expanding M2. "The more active the financing activity, the more banking system liquidity is digested, leading to rising liquidity demand," the report said.

Money market rates were driven to record levels last June after the PBOC moved suddenly to cut off the flow of liquidity into the interbank system. Officials said that the goal was to force deleveraging, but the central bank`s sudden, poorly-communicated move sent panic through the system and forced the authorities to back off and make direct liquidity injections. The PBOC may have lost that battle, but the war is ongoing.

Rates Rising.
Market rates have risen, increasing financing costs and opening up fissures in the interbank market which are expected to lead to more and more investment products getting in trouble. The seven-day repo rate – which is a candidate for a market benchmark rate under the government`s financial reform plans – averaged 3.78% during the first half of last year and 4.38% in the second half. The 10-year Ministry of Finance yield has also risen sharply, reflecting a shift into riskier paper amid tighter liquidity conditions.

’Moral hazard continues to rule the financial system.‘
Despite its anodyne wording, the PBOC report does indicate once again that the authorities are aware that a badly mismatched system stands an ever-greater risk of getting into trouble. Market participants are braced for a fresh wave of regulatory curbs, particularly in the wake of a State Council notice at the end of last year suggesting that management of the policing of the shadow banking system has now been elevated to the executive body.

The PBOC itself provided few clues about its plans, saying only that it will step up monitoring of financial system risk and "explore market mechanisms to solve local government debt problems.” That will help tackle the existing stock of debt, but doesn`t explain how Beijing is going to deal with the dramatic rise in Chinese financing while delivering the growth needed to create jobs and maintain social stability.

The Communist Party is pledged to a sweeping economic and financial system overhaul, but the PBOC report suggests that it sees little change for now. "The Chinese economy's reliance on debt and investment, the high investment model and the overconcentration of resources in real estate and other sectors mean it is easy for debt levels to increase,” it said, before drawing the underwhelming conclusion that: "The massive local financing-construction model has strengthened in recent years, increasing the potential for risks to the economy's performance."

Despite signs of a credit splurge in January, market participants are already betting on whether the PBOC will actually ease policy in the first quarter to offset signs of sharp disinflation and slowing economic growth. That doesn`t bode well for attempts to grapple with the risks posed by shadow banking.

Pragmatism Rules
China avoided potential calamity by effectively bailing out China Credit Trust. Supporters of the government`s refusal to allow for defaults would call this approach pragmatic, that the known unknowns of failure warrants caution. Besides, in allowing Lehman to fail, the U.S. Treasury arguably worsened the global financial crisis, they argue.

But not everyone agrees with this approach. In China default has its supporters. A source familiar with discussions at the level of the State Council said he had been hoping that a China Credit Trust default would teach the market a "profound lesson."

But he is in the center, and provincial governments tend to have greater influence because they`re closer to the action. "Local governments don't want their financing costs to get too high because of a default and they're worried about accounting to the central government," he said. China has been kicking cans and dodging bullets for years, to the extent that its banking system is nearly the size of the U.S. and Japan`s combined ($30.68 trillion). The government has made the right noises about cleaning up the financial system, but the China Credit Trust agreement suggests that it is not yet ready for action.

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 21^st 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

"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.

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 6^th 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?”

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.

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 6^th 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

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 12^th 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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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 5^th 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.