China, the true heavyweight

artwork here

Bloomberg BusinessWeek snapshot article.

The most immediately visual evidence of China’s one-child policy is the chubby male kid tended to by multiple adults (those two parents and six grandparents) as he waddles down the street. 

When I was in China for the first time (our adoption trip), I almost felt like I was part of some magical character parade in a Miyazaki film (you know, those floating fat spirit characters from “Spirited Away”) because, compared to the Chinese, we Americans were huge.   Most of the guys weighed over 250lbs and most of the women were over 150.  The disparity was stunning.

Until you spotted that overweight “little emperor” be tended to so gently by the doting grandparents.  Thirty percent of Chinese adults are now overweight, and their numbers lean toward the younger ones—the initial products of the one-child policy going back to the early 1980s.  Just six years ago the share was 25%.  The share will keep rising:  40% of Beijing boys are overweight.

In America, roughly 2/3rds of adults are considered overweight.

The story starts with a suitable poster child:  26-yeard-old Shanghai man, 5-9 and 220 lbs.  He remembers being “plied with dumplings, ice cream, and Kentucky Fried Chicken by his parents and grandparents.”  Now he fears an early heart attack.

This is a tricky issue in a country that has as many uninsured people as we’ve got people (300m), thus the gov is spending $125 to get everyone covered by 2020.  Type 2 diabetes numbers now approach 100m and are sure to rocket far higher.

Bottom line:  anybody who does healthcare, weight control, and fitness has a future in China—a very BEEEG future!

The equally important superpower

WSJ article.

Former finance chief says Japan’s relationship with the US is key, which is code for, “I won’t break my predecessor’s basing deal.”

But then he’s quick to add that China is “equally important.”

When Japan tells you that, understand that’s as good as the world telling you that.

What that tells you is that there is no such thing as “hedging” against China’s rise anymore—except in a purely internal sense.  We can gear up all we want, say, militarily, and we’ll certainly find friends in that process, but there will be no political nor economic equivalent, and that means bluster without bulk.

Obama & Co. seem to have made that adjustment mentally, which sure beats anybody unable to make that adjustment.  But that understanding is just the beginning of the new relationship, and that’s where I sense there’s no there there with this crew.  And I’m beginning to believe that, given everything on their plate right now, this is the best we can expect.

That would say one-term to me, except I cannot, for the life of me, imagine right now who the Republicans would successfully mount from amidst their Tea Party-infused base, which, quite frankly, strikes me as mostly angry without answers.

But maybe that’s my stagnant disposable income talking . . ..

Pollution in China: the recovery trumps the reduction

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WSJ piece by always good Shai Oster.

Despite tougher government measures, pollution in China rebounds right along with the economy. There had been hopes that China turned a corner last year when emissions dropped, but thank the financial crisis for that.

Still, only the first quarterly rise in SOx emissions since 2007, so some props in order.

No surprise here:  reductions took a back seat to recovery.

Remember all the Great-Depression-leading-to-World-War-III nonsense in the BS-osphere?

Well, it was worth it.

You cool the market--you cool it too good!

WSJ article by Andrew Batson—a favorite.

China’s government has spent a lot of effort pouring cold water on the red-hot real estate market, and it has apparently succeeded.

Now experts cite a “period of paralysis that some industry executives say will last for months, weighing on global growth prospects already battered by Europe’s turmoil.”

Hmm.  Be careful what you wish for, I guess.

The rebound in real estate was considered a prime driver of China’s successful recovery from the global financial freeze.

Still, something had to give with China’s unreal growth this year.  People are describing a 20% haircut in prices—stretched out over months.

Not so bad.

China: the labor revolution has begun

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FT article and editorial on the recent spate of Western companies giving into local Chinese labor demands for higher wages.  The FT says “Chinese workers are now in revolt”!

Believe it or not, but these are the next-best set of problems for both China and the global economy.

As the FT editorial argues: “Higher wages are a goal of successful development.”

These wage hikes are just the beginning; the Chinese labor force is starting to understand its own power in this ongoing struggle.  The FT editorial says:

The remarkably low share of wages and salaries in GDP makes China the most “capitalist” large economy in history.

What will Chinese and Western firms do?  They will be forced to move ever inland—a self-limiting prospect in terms of profit (longer overland transpo costs), and yet, this is the best possible trend for China itself—the harmonization of development coastal-versus-inland.

Then there’s the larger reality that the numbers of youth entering the workforce will slowly decline over the long-term, raising their bargaining power ever more.

Doesn’t mean China declines rapidly as a manufacturing power.  It just means this playing field evens out progressively over time.

All good stuff that shows how China pays the globalization “price” just as much or more than the world suffers the “China price.”

Nothing magical about China’s state capitalism; the same leveling market dynamics work their wonderful magic here as anywhere else.

More evidence of China's evaporating "cheap labor"

Foxconn is the world’s largest electronics contract manufacturer, meaning it’s contracted by huge Western firms (Dell, HP, Sony, Apple, Motorola) to build on its behalf in cheaper-labor locales, like Asia and China in particular.  This is how the West remotely controls the bulk of China’s manufacturing exports.

Well, that easy labor advantage for China is fast evaporating.  I routinely harp on the demographics (2010 is the “golden year” when the ratio of dependents to workers hits its lowest mark, only to rise from here on out thanks to a rising number of elders as China ages more rapidly than any society in history), but the more compelling short-term issue is rising demand among coastal labor for higher wages.

And when you don’t give it to them, they start staging nasty, attention-grabbing suicides in your factories.

So booyah!  Here comes a 30% increase for worn-out workers in that communist paradise, and guess what?  That increase eventually gets passed on to consumers, meaning China’s labor advantage erodes.

Where does it go next?

Some goes to interior China.  Some goes to SE Asia.  And China will direct some to Africa as part of its penetration/accommodation there, as it seeks to slot in cheaper African labor under itself as it moves up production chains.

All good stuff, but it shows you, there is no such thing as a permanent advantage in cheap labor.

A familiar sort of populism, from the ground (literally) up

NYT story that warms my heart:  average Chinese citizens getting uppity over development issues--or the real estate sort.

When China’s land boom excited a frenzy of popular resistance late last year — including headline-grabbing suicides by people routed from their homes — Chinese policy makers finally proposed a solution: rules to protect citizens from unchecked development and to fairly compensate the evicted.

Today in Laogucheng, a dingy warren of apartments and shops slated for redevelopment on Beijing’s far west side, the fruits of that effort are on vivid display: a powerful developer is racing to demolish the neighborhood before the rules are passed. And about 700 gritty homeowners are adamantly refusing to move until they get the fair deal they hope the rules will provide.

“This is a limbo period,” one holdout, Tian Hongyan, 49, said after a stroll amid the rubble of his half-bulldozed neighborhood. “And during it, we’re seeing even more sudden and violent demolitions occur around the country.”

China is not a good setting for a Frank Capra tale, but people do have influence over their autocratic masters. Top officials are worried that the property rush — which has led to soaring prices for urban real estate and low prices for old homes and farmland seized for development — is enriching local governments and well-connected developers at the expense of ordinary people and social stability.

Protests like those in Laogucheng — including self-immolations and deadly standoffs — have forced officials to at least consider measures to make it harder to seize property and turn it over to developers without fully compensating those who live on it or use it. 

The lack of rules is the usual suspect, and nastiness ensues:

Without updated rules, local governments pick renewal sites at will, then leave negotiations with residents to developers, demolition companies and low-level “demolition and relocation offices.” They frequently low-ball home-purchase offers, cut off utilities and even hire gangs of thugs to terrorize homeowners.

Powerless to stay and too poor to move, many Chinese have rebelled.

As usual, the Party is forced to choose and/or balance between growth and angering the population too much.

Honda disabled by strike at Chinese factory! I blame the communists!

WAPO, FT and WSJ stories.

Honda hit by strike from 1,800 workers at transmission factory that disabled adjacent production in three other plants.

How much stomach does Honda have for labor unrest in China? Even less than the Chinese Communist Party, whose rep for working labor within an inch of their lives is capitalistic enough.

So a weekend later we get news of a 24% pay increase.

Expect to read a LOT of these stories in coming years.  It's not just the demographic shift (adding more old people after years of only cutting down the number of babies) that ends China's legendary-but-momentary "cheap labor" advantage.  Workers, with practice, will get uppity.

What Confucians saw in Thailand

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Brilliant piece by Daniel Bell out of Tsinghua U (my favorite Beijing stomping ground) in Japan Times via WPR's Media Roundup (indeed, a great example of what WPR brings to your attention).

I will quote at dangerous length:

Whatever the effects of political turmoil in Thailand, they have not helped the cause of democracy in China. The images of prodemocracy protesters and the subsequent military crackdown in downtown Bangkok have been openly shown in Chinese media without any apparent bias. Indeed, there is no need to embellish the political message for China.

If a relatively well-off and religious country known as the "land of smiles" can so rapidly degenerate into bloody class warfare, what would happen if the Chinese Communist Party lost its monopoly on power?

It is not hard to imagine a Chinese-style red-shirt rebellion, with populist leaders tapping resentment and hotheaded youth torching symbols of privilege in Beijing. If multiparty democracy leads to violent and uncompromising electoral blocs, then most reflective people will prefer one-party rule that ensures social stability.

Still, it would be a mistake for the Chinese government to treat the events in Thailand as an excuse to postpone political reform. The gap between rich and poor is about the same in both countries, and there are tens of thousands of class-based "illegal disturbances" in China every year.

The Chinese government is promoting social welfare in the countryside, but it must also give more institutional expression to social grievances. That requires more representation by farmers and workers in the National People's Congress and subnational legislative organs, more freedom for public-spirited journalists to investigate cases of social injustice, and more freedom for civic organizations to act on behalf of the environment and those who do not benefit from economic reform.

Can China open up without going the way of multiparty rule?

In fact, the great 19th-century British political thinker John Stuart Mill advocated liberal government without multiparty rule ... In Mill's view, an open society ruled mainly by educated elites is the most desirable form of government.

In a similar vein, the Confucian tradition has long emphasized the value of political meritocracy. Confucius himself emphasized that everybody should have an equal opportunity to be educated. But not everybody will emerge with an equal ability to make informed moral and political judgments. Hence, an important task of the political process is to select those with above-average morality and ability. In subsequent Chinese history, the meritocratic ideal was institutionalized by means of the Imperial examination system.

Confucians do not oppose electoral democracy, but they argue that it must be constrained by meritocratically selected political leaders who look after the interests of nonvoters . . .  

As it happens, the Chinese Communist Party is becoming more meritocratic. Since the 1980s, an increasing proportion of new cadres have university degrees, and cadres are promoted partly on the basis of examinations. But choosing educated elites is only part of the story.

The elites are also supposed to rule in the interest of all, and to allow for their voices to be heard.

In practice, it means a more open and representative political system, but not necessarily multiparty politics.

Okay, I cut about 200 words.

Just a brilliant piece that shows how China will seek to be different, based on deep local custom, but will invariably have to conform to the demands of its people for more say.  

Is the system described here that much different from ours professional political class?

Yes, in the sense that few of them are great minds.  But no in the sense that the professional bureaucracy (highly educated and highly ethical, in my experience) runs much of DC.

I think this is how China evolves:  increasingly smarter, increasingly competitive, increasing use of polls that simulate voters' preferences (already being done at the top).  But I also think China will need, for a stretch (meaning another 20-25 years) the illusion of single-party unity.  

My democratic breakthrough for China is a 2030s deal.  Can come earlier, but unlikely to go longer.  The complexity will grow too great and the people far too competent.

But until such critical masses are reached, expect China to remain as Chinese as possible while submitting to huge and pervasive and magnificent change/stress.

No one wants that place to blow up, because no one will benefit from that pathway.

China plays global central banker on euro too

WAPO story about how just a reassuring word from China that it won't sell off any significant portion of its euro holdings is enough to calm global markets regarding the ongoing eurozone crisis.

That, my friends, is an amazing world.

Divisions within PRC over DPRK?

Clinton with South Korea's president last week.

NYT story on perceived divisions within China over how to respond to latest NorKo shenanigans.

While China’s decision-making on core foreign policy issues tends to be secretive, American officials said they had picked up hints that there was some disagreement within the leadership about how to respond to North Korea’s behavior, pitting civilian party leaders against the military.

The debate surfaced last year after North Korea tested a nuclear device, American officials said, and has accelerated since the attack on the South Korean ship, the Cheonan. Chinese civilian leaders have expressed growing puzzlement and anger about the North’s behavior, these officials said, while military officials tend to see the North’s moves as more defensible given the threat North Korea perceives from the United States.

Unsurprising split.  Just interesting that it's becoming apparent to outsiders.

Balancing in Asia: no effort required

WSJ story, latest in a long line regarding China's rise/NorKo/etc. Anything that unsettles Asia makes darn near everyone there was to keep America's friendship--and its military in region: South Korea over the crisis, naturally; and Japan over the bases; but also Malaysia and Vietnam, says the piece.

Your globalization $ at work: CA start-up, PRC tech, OH factory, US jobs

WSJ story.

CA start-up Coda Automotive is set to build factory in Ohio with 1,000 jobs, using Chinese technology to make lithium-ion batteries for an all-electric vehicle.

Batteries are too heavy to ship, so Coda wanted a US-based factory.  Until it's up and running, a previous JV set up in Tianjin will make the initial batteries.

The gap between our deep econ-network relationship with China and our paltry pol-mil bond

Been saying this for years: the connectivity skyrockets, but the cooperation does not keep pace.  Politics lags behind economics and security lags behind networking, and the widening gaps are dangerous to all involved.

Pacific Command boss Admiral Robert Willard noted China's "assertiveness" in its regional waters, as captured in an FT story prior to the recent Strategic and Economic Dialogue:

Adm Willard said the US viewed China's growing influence in Asia as positive. But Beijing needed to be more transparent, not only with the US but also with its neighbours.

Adm Willard was speaking ahead of talks with Ma Xiaotian, deputy chief of general staff of the PLA, the first meeting between senior US and Chinese military officers since Beijing suspended bilateral military-to-military dialogue in January after US arms sales to Taiwan.

"US-China military dialogue is officially still in suspension," said Adm Willard, who visited Beijing at the invitation of Hillary Clinton, secretary of state, in the context of the Strategic and Economic Dialogue, the bilateral exchanges that concluded yesterday.

But he interpreted the fact that Beijing had agreed to his presence as a sign it viewed some high-level exchanges as beneficial.

"What was very striking yesterday was my impression of the very advanced, sophisticated and mature dialogue that's occurring across a wide range of subjects between China and the US," he said.

"That is in contrast with a very immature military-to-military relationship."

I would say the admiral hit the nail right on the head.

Another big Chinese investment in African minerals

Pic here, along with stunning accurate 2008 prediction of this investment

FT story on China investing $877m into South African mining industry--the second largest Chinese investment in Africa outside of oil and the first time China takes a direct stake in Africa's platinum reserves.

South Africa holds an 80% share in global platinum production, so it wasn't a tough prediction to make.

China spans globalization's wealth and poverty

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Trudy Rubin op-ed in Miami Herald via WPR's Media Roundup.

Notion that China contains all four "worlds" of globalization.

I've typically tried to capture this notion by saying that, to make America China's true demographic/economic equivalent, you'd have to invite all of the Western Hemisphere, plus most of Sub-Saharan Africa to come and live inside our territory (we are roughly the same geographic size as China at 9.5m square kilometers).  That way you'd have quite a chunk of rich people, a big middle class, and a huge impoverished rural population.  

Oh, and to make it like China, you have to keep America's pop distro still overwhelmingly concentrated along the coastlines--as it is today.

Rubin leverages the notion of multiple worlds from a Chinese academic (Hu Angang), who says China's "first world" are the coastal cities, and its "second world" is a somewhat affluent belt just inside the coastal line.

That combo makes up about 300m of China's 1.3B.

The "third" and "fourth" worlds are just belts that exist farther inland, with the impoverished western provinces accounting for the bulk of China's most impoverished--and most Muslim and most restive.

So it's a series of north-south bands; the farther in you go, the poorer it becomes.

Old chart, but you get the notion.

Point being, when you think of China, be impressed with the first and second worlds along the coast, but remember that a billion Chinese are still to join that party--by and large.

Thus, China doesn't exactly buy into the notion of being our economic peer--just yet, and really won't have that mindset for a long time. It will also justify all manner of mercantilism and protectionism and tough trading on the basis of needing to make economic development spread inland.  

Without it, the Party fears the growing inequality inside China will tear the place apart.

When push comes to shove, US bases remain

WSJ cover story.

Yes, the NIMBYs have at it, and yes, Hatoyama resigns for breaking campaign promise, but the Marine bases remain.

NorKo drove the reaction this time; in the future China's build-up will be the excuse.  

Point is, America never really has trouble locating new bases when the need arises and only occasionally has trouble holding onto old ones.  When the latter happens, new offers to host inevitably flow.

Why?  All these rising great powers are good for the business of alliance-building and balancing.

There is no surpassing the US Leviathan; there is only triggering regional balancing responses that bolster its presence.

Globalization's great infrastructural buildout: China's grid

WSJ story by Shai Oster.  Pic is of smart-grid demo center in Yangzhou.

GE, Siemens and others all competing fiercely to gain footholds in "one of the world's biggest markets for advanced power transmission and distribution systems."

I remember talking to a GE exec in 2005 in Williamsburg:  he said GE would make the bulk of their future profits on electricity and water alone--in Asia.

At least $100B spent over next decade, comparable to what we're spending for upgrades to our currently, far too dumb grid.  China likewise expected to spend $60-80B per year on gear, but Chinese companies will dominate there, so the smart-grid operation niche is where it's at for the West.  

The BOP (bottom of the pyramid) logic is clear:  

GE says the size of China's expected demand also offers opportunities for economies of scale in smart-grid products.  Long term, that could make products exported to other countries cheaper to produce.  GE said it would expand research facilities it already has in Shanghai.

Right now, China's losses due to bad transmission are roughly tripled that in the West (8% compared to OECD average of 2.5%).

The Rooseveltian phase in China

Guardian story by way of WPR's Media Roundup.

Makes me think of TR's initial stuff and then the huge infrastructure push with FDR, this Hoover Dam-like monstrosity planned for Tibet--the biggest dam in human history (38 gigawatt).  Will save tons of CO2, but will likewise change the environmental landscape big time.

But China feels compelled to network and integrate its western provinces--its great inland bridge to the larger energy and mineral resources in Central  and Southwest Asia.

And frankly, tightening the grip makes sense politically, whereas landlocked states do not.

The key for China:  making all this integration seem like a connectivity bonanza that allows economic development, networking toward the richer and better connected coasts, but also allows for increasing political self-rule--less unitary and more federal.  

That's the only way you make economic development work over such a large terrain.

Almost 30 dams are currently planned or being built along this crucial Tibetan river (Bahmaputra).

China: looking to take next step toward global brands

Usual excellent stuff from WAPO's John Pomfret.

The lead:

Quick: Think of a Chinese brand name.

Japan has Sony. Mexico has Corona. Germany has BMW. South Korea? Samsung.

And China has . . . ?

If you're stumped, you're not alone. And for China, that is an enormous problem.

Last year, China overtook Germany to become the world's largest exporter, and this year it could surpass Japan as the world's No. 2 economy. But as China gains international heft, its lack of global brands threatens its dream of becoming a superpower.

No big marquee brands means China is stuck doing the global grunt work in factory cities while designers and engineers overseas reap the profits. Much of Apple's iPhone, for example, is made in China. But if a high-end version costs $750, China is lucky to hold on to $25. For a pair of Nikes, it's four pennies on the dollar.

"We've lost a bucketload of money to foreigners because they have brands and we don't," complained Fan Chunyong, the secretary general of the China Industrial Overseas Development and Planning Association. "Our clothes are Italian, French, German, so the profits are all leaving China. . . . We need to create brands, and fast."

The problem is exacerbated by China's lack of successful innovation and its reliance on stitching and welding together products that are imagined, invented and designed by others. A failure to innovate means China is trapped paying enormous amounts in patent royalties and licensing fees to foreigners who are.

China's government has responded in typically lavish fashion, launching a multibillion-dollar effort to create brands, encourage innovation and protect its market from foreign domination.

Through tax breaks and subsidies, China has embraced what it calls "a going-out strategy," backing firms seeking to buy foreign businesses, snap up natural resources or expand their footprint overseas.

Domestically, it has launched the "indigenous innovation" program to encourage its companies to manufacture high-tech goods by forcing foreign firms to hand over their trade secrets and patents if they want to sell their products there.

Since 2007, thousands of Chinese businessmen have attended government-sponsored seminars on "going out," learning everything from how to do battle with domineering Americans and Britons during conference calls to why a Chinese boss should think twice about publicly humiliating his wayward foreign workers -- as he'd do to his staff at home.

China has also moved to re-brand China itself. Late last year, when memories of China's poisoned pet food and deadly milk were still fresh, the Ministry of Commerce contracted with the global advertising giant DDB for a $300,000 ad showing a series of high-tech products, from top-of-the-line running shoes to an iPod.

As a guitar wails, a voice intones: "When it says 'Made in China,' what it really means is made in China, made with the world."

This is always the tough stretch that I think about when people start predicting China's inevitable domination of the global economy.  Brands a lot more complex that most prognosticators imagine.  I mean, just look at BP all of a sudden--from "beyond petroleum" to beyond pathetic.  You can hire ad agencies to hawk your stuff, but that's just surface sheen.  The real brand loyalty comes in the ability to offer compelling innovation, excellent services, and the like.  That sort of capacity can't be ordered from above; it has to be nurtured from below.  A bunch of guys sitting around a table in Beijing won't be able to pick winners consistently, and in their failures, legitimacy will be lost, grumbling will ensue, and that much more resources will be wasted on policing people and their dangerous thoughts instead of winning hearts and minds and brand loyalists through modeled behavior.  Single-party states simply aren't cool, and they will never will be.

More excellent analysis:

In recent months, the Western media have hyperventilated with stories about China's going-out strategy and about Chinese firms buying up the globe -- Oil! Gas! Cars! -- and even investing in the United States. In 2000, China had $28 billion in overseas investments; this year, it could break $200 billion.

But a little perspective: Even if China's total foreign direct investment hits $200 billion, it still pales in comparison to smaller economies, such as Singapore's, Russia's and Brazil's. And China has plunked down only about $17 billion in rich countries, equivalent to the overseas assets of a single medium-ranked Fortune 500 company.

The 34 Chinese companies on the Fortune 500 list basically operate in China only. The world's three biggest banks are Chinese, but none is among the world's top 50, ranked by the extent of their geographical spread.

"Moving forward another 10 years," said Kenneth J. DeWoskin, chairman of Deloitte's China Research and Insight Center, "it's hard to see how viable Chinese companies will be if they just stay in China."

China's attempts to fight what it sees as the stranglehold of foreign patents and intellectual property rights have also had hiccups.

China is estimated to have paid foreign firms more than $100 billion in royalties to use mobile telephone technology developed in the West, according to executives of Western communications companies.

So in the late 1990s, it decided to develop its own. But after more than $30 billion in development costs, its unique technology still has fewer than 20 million users in a market of more than 500 million.

Handset makers have told China's government that they won't produce phones equipped with the new technology unless they are given subsidies. And China has resorted to giving away the technology to Romania and South Korea to encourage broader use.

"China is still stuck," said Joerg Wuttke, former president of the European Union Chamber of Commerce in China and a 25-year veteran of doing business in China. "There is a huge disconnect between the money spent in universities and the lack of products."

China also faces enormous challenges to creating globalized firms. Studies of Chinese executives show that they spend far more time with government officials -- who in China are the key to their profits -- than with customers, who are the key to international success.

"Chinese executives like me need to spend a generation outside China to learn how business is done around the world," said Hua Dongyi, who chairs a massive Chinese mining company in Australia but has also built roads in Algeria and infrastructure in Sudan.

Remember that line:  Chinese execs spend far more time with their party bosses than focusing on customers.

In a nutshell, there's the Achilles heel of state capitalism.

And that's not a problem you can fix by throwing more $$$ at it.

Rest of the story is about how Lenovo's purchase of IBM computer production was a rare success.

As always, Pomfret captures reality in China--absent hype--better than anybody else.