Category Archives: International Trade

Book Review: “The End of Cheap China” by Shaun Rein

Sensationalist stories about China’s supposed looming economic collapse captivate international headlines. While these articles might be entertaining to read or talk about, they nevertheless perpetuate an inaccurate picture of an evolving Chinese economy. The really big China story is perhaps too mundane for editors looking for catchy headlines. That is, the emergence of the largest middle-class in the world- beginning with Deng Xiaoping’s reform and opening up in 1978 and still being written today.

Upon my own arrival to China nearly five years ago, it became clear fairly quick that the younger generations living in urban areas would not be content to continue working in low-wage factories and construction sites forever. Following a similar arc of modernization and urbanization that developed countries went through in the past, albeit at a much accelerated rate, China ambitiously aims to move up the value chain economically.

This development is not easily grasped for those who haven’t had the opportunity to invest significant time interacting with people on the ground in China. Luckily we have Shaun Rein and his book The End of Cheap China to tell us the story of China’s evolving trends. The book was released in 2012, but the predictions Rein makes are perhaps even more relevant today than when it originally came out two years ago.

Rein, a consultant to foreign businesses looking to succeed in the China market, is a polarizing figure among the “China Watcher” community. His critics (mostly other expatriates in China) see him as an opportunist, shamelessly networking with high-level government officials and business leaders, and presenting a naively optimistic view of China’s future. Yet it would be a mistake to suggest that Rein is in denial of the tremendous challenges facing the country. Rather, his position is based on rigorous observation and analysis of the changing values of China’s upwardly mobile population. The End of Cheap China is anything but naive, interweaving Rein’s anecdotes of personal interactions with statistics and case studies.

Rein has been in China long enough to see beyond the physical changes to observe social shifts and how they impact individuals. In a chapter titled “The Modern Chinese Woman” he tells the story of an acquaintance he made while living in the northern port city of Tianjin. “Amy”, who Rein originally met in 1997, was a bashful young waitress at a local cafe, working hard and keeping her head down.

When Rein returned to Tianjin more than a decade later and ran into Amy, he found a confident, stylish woman complete with a designer bag and trendy clothes. After catching up with her, he learned she had left her waitressing job and had been working for several multi-national companies doing business in the city. Her prospects turned out to be so good in fact, she expressed interest in becoming an entrepreneur and starting her own business. Opportunities like this abound for young and savvy Chinese urbanites. Competition is fierce in China’s cities, but compared with the chaos that ensnared the country during most of the 20th Century, there has never been a better time to be a young person in China.

Perhaps of most interest to readers of this blog is the book’s insight into China’s real estate sector, which has an entire chapter dedicated to discussing the subject. Near the beginning of the book, Rein demonstrates his deep understanding of how the real estate game works under a case study section titled “What To Do and What Not To Do in China”:

Real estate is intentionally ramshackle. Many Westerners say Chinese real estate companies exhibit poor urban planning. A common complaint by visiting Westerners is that malls are not built attractively, or that parking lots are built on prime building locations, like on a riverside, while shopping complexes and restaurant zones are built across the street without good river views.

Criticisms like this does not survive basic analysis. Rules force developers to start construction soon after buying land from the government. It is illegal to hold on to land as an investment, so real estate developers who think land values will continue to rise either will build something as cheaply as possible, in the hopes of knocking everything down and rebuilding when prices go up, or will put up parking lots to fulfill regulatory requirements and delay prime construction on the property until later.”

This sober explanation of China’s real estate industry is not something you’re likely to read in the pages of the New York Times or one of the countless alarmist articles about China’s “ghost cities”. Rein goes on to debunk the popular opinion by perennial China bears such as economist Nouriel Roubini and hedge fund manager James Chanos that the country has over-leveraged itself on infrastructure development.

Development of new highways and rail lines (both urban metro lines and inter-city high-speed rail) might seem superfluous to outsider observers, but these transportation networks are key to successful urban development, including the availability of affordable housing. As Rein writes: “The need for less-expensive housing and commercial space will require urban areas to spread out, and for all infrastructure spending to be used on railroads, subways and airports.

The book’s chapter on real estate does acknowledge some problems within the industry, including the lack of quality management in new commercial developments, which may cause some developers to fail. As a matter of fact, this is already happening in some cases, yet Rein points out that because commercial real estate only accounts for 20% of new construction, any serious problems in this sector are unlikely to have a catastrophic impact on the overall economy.

The underlying message throughout the book is a warning to foreign businesses to not assume that China will always just be a “cheap place to manufacture things”. On the contrary, it is important at this stage of economic development for savvy investors to seize the opportunity in selling to the rapidly growing Chinese consumer class. Granted, many foreign businesses have already seen this opportunity, but Rein warns of the competition from domestic Chinese firms such as Haier (in the home appliances market) and Tencent (in the social media space) who are developing strong brand awareness and consumer trust within the local market.

Perhaps it is fitting that this review end with a mention of successful home-grown Chinese brands as Rein recently announced a follow up book coming out in November of this year titled “The End of Copycat China“. Up until this point, Chinese companies have been seen by the international community as ‘copycat artists’ stifled by a controlling government and an inability to think creatively. Holding onto this view going forward is dangerous, not only for investors involved in China but for global brands competing for market share internationally.

Rein’s new book is bound to be insightful and timely. In the meantime, if you haven’t already, I highly recommend The End of Cheap China as an excellent guide to understanding the current state of economic development in The Middle Kingdom.

China In Africa: An Interview With Go West Project

African Union Building A local looks up at the new African Union Headquarters in Addis Ababa, Ethiopia. The complex was funded entirely by Chinese money. Photo Credit: Go West Proejct

In 2009, China surpassed the U.S. to become Africa’s single largest trading partner. Yet the burgeoning relationship between China and Africa is no ordinary trading arrangement. Rather than colonizing the continent as Western powers did in the past century, China is trading infrastructure development and urbanization expertise for access to Africa’s vast natural resources. This re-balancing of trade has yet to be studied in depth as it is probably too early to tell what the impact of China’s involvement in Africa will have on the broader world’s economy.

What we can observe is the immediate impact China is having on Africa’s urban development. Luckily we have Dutch researchers Michiel Hulshof and Daan Roggeveen of the emerging cities think-tank Go West Project to explain to us what is happening on the ground.

I first met Hulshof (a journalist) and Roggeveen (an architect) at the 2011 Chengdu Biennale where they presented their research on China’s developing western metropolises (hence the name of their think-tank). Their research culminated in the book How the City Moved to Mr. Sun – China’s New Megacities (2011), which looks beyond the so-called 1st Tier cities of Beijing and Shanghai to tell the story of urbanization in the country’s heartland.

Now Hulshof and Roggeveen are looking even further, beyond China’s borders, to study what the Chinese urbanization experiment means for Africa’s cities. They were kind enough to take the time to answer some questions for us about their initial research:

Adam Mayer (AM): Please give us a summary about your research in Africa and what interested you about studying China’s impacts on the continent.

Go West Project (GWP): In our book “How the City Moved to Mr Sun” we described the mechanisms behind the emergence of megacities in Central- and West-China. We are currently working on a new study into China’s involvement in African urbanization. Given the growing impact of China in the world, and the strong ties between China and Africa, one could think of the physical impact that China has in Africa.

It seems the Chinese are already exporting parts of their urban model to Africa: new “Special Economic Zones” in Zambia, Nigeria and Ethiopia, Chinese residential models in Angola or Kenya and Chinese roads, airports and railways all over Africa. There’s also a new approach of “soft power” with Chinese-led African newspapers and television stations, Chinese language schools, university grants for African students and professionals, and Chinese medical aid projects in Africa. We think this phenomenon deserves an unprejudiced look as to what this means for the development and the future of African cities.

AM: What are those impacts that China’s economic development has had on Africa? Are there certain regions or countries in Africa that have benefited more from China’s business interest in the continent?

GWP: These impacts are both tangible and non-tangible. On the tangible side, China constructs roads, railroads, ports, airports, but also telecommunications structures, fiber optic networks, dams and even satellites. It builds schools and offices and has even given the African Union their headquarters as a present. On the non-tangible side, there are grants for students, increased influence of the media – CCTV has already 80 journalists in their Nairobi office! – and Confucius institutes. Of course, the countries with resources are very attractive to go to for the Chinese – but not only them Royal Dutch Shell is already for decades involved in Nigeria.

AM: China is trading its development and urbanization know-how to certain countries in Africa in exchange for resources- What are some prominent examples of infrastructure or building projects built by the Chinese in Africa?

GWP: The most symbolic one is the structure of the African Union building: a 200 million dollar gift from China to Africa. The building was designed in China (by the Tongji Architecture Planning and Design Institute), built with Chinese materials, by a team of half Chinese and half local workers. In Nairobi, we came across the Great Wall apartments on Beijing road, a development by a Chinese real estate developer. The most amazing example is of course the new towns of Kilamba Kiaxi in Angola, where CITIC developed and built 750 highrise apartment blocks.

 Kilamba_KiaxiKilamba Kiaxi in Luanda, Angola

WorkersAfrican & Chinese Construction Workers. Photo Credit: Go West Project

AM: One criticism of China’s venture into Africa is their use of imported Chinese labor to construct new cities rather than using local labor which would help job creation in the region. In your research did you find this to be an issue?

GWP: This is only partly true, and differs strongly from country to country and from project to project. More and more, the Chinese are aware of the fact that hiring locals improves the engagement of a project. What you see very often is a construction site (or a factory for that matter) with Chinese site supervisors, and local laborers.

A way to have local people profit more is not to hire Chines companies, but local companies for construction jobs. However, local companies can often not compete with Chinese ones in speed, price and quality.

AM: Based on studying China’s influence in Africa, do you feel that China is setting a new standard for developing county’s around the world that aspire to urbanize and grow their economies?

GWP: Africa’s urbanization is staggering. Africa’s urban population, which was 395 million in 2010, will be no less than 1.2 billion in 2050. That means Africa’s cities will have to accommodate an extra 40,000 people every day for the coming 15 years. If there’s one country in the world that has experience with such an enormous rural to urban transformation, it is China.

However, implementation of Chinese strategies on African soil seems so far hardly possible due to differences in political and economical structures.

Therefore, we think that the impact of Chinese presence in Africa will depend very much on the local conditions, and will strongly differ from country to country and city to city.

Michiel Hulshof is partner at Tertium, an Amsterdam based office for strategic communication. Daan Roggeveen is the founder of MORE Architecture, Shanghai and Curator at the University of Hong Kong/Shanghai Study Centre.

Be on the lookout for further research on this topic as Go West Project is currently preparing a theme issue of the magazine Urban China, with contributions by Brechtje Spreeuwers (NL), Huang Zhengli (CN), Njeri Cerere (KE) and Paulo Moreira (PT).

China and the Legacy of Steve Jobs

Fake ‘Apple Store’ in Kunming

It is not hard to understate the influence that Apple has had on China. If we examine the role the country plays in the supply-chain of Apple products, then China’s relationship with the company is undeniable. It is safe to say that without China’s contribution to the manufacturing and assembly process, Apple’s stylish products would be unaffordable to the average consumer around the globe.

That’s why last year when a string of suicides hit Foxconn, the company that manufactures products such as the iPad and iPhone, Steve Jobs was quick to announce that Apple would look into the working conditions. Jobs, a marketing genius, knew that negative PR associated with Foxconn would hurt Apple’s sleek and stylish image in the U.S.

What commentators in the U.S. failed to notice is the relative ambivalence of people in China regarding the Foxconn suicides. When I asked my Chinese colleagues what effect the incident had on their perception of Apple, they responded that there was absolutely none. Not only that, they defended Foxconn by saying that the rate of suicides among workers (there are tens of thousands of them) is not abnormal for society at large.

The willingness to defend Apple and its manufacturer is a testament to the huge popularity of the brand in China. From first-hand observation, it seems that Apple products are as ubiquitous here as they are in my native Silicon Valley. It is certainly not only about function- rather, owning an iPhone or iPad is akin to owning a luxury handbag from Hermes or Prada. I know many people who are willing to spend 2 or 3 months salary or even borrow money from friends to purchase an iPhone.

Perhaps more baffling is the fact that Apple products cost more in Mainland China than they do outside. This defies logic given that most of the products are made here…one would think that a reduction in transport cost would bring the price down. The reality is that despite being ‘made in China’, Apple products are treated as ‘imports’ and are taxed as such. This is done to encourage the consumption of domestic products rather than foreign competitors.

The high price point has done nothing to deter Chinese consumers from buying Apple products. Even when the comparable Lenovo tablet computer is advertised for 1000 RMB (~$156.00 USD), Chinese consumers are willing to pay 4 to 5 times that price just to have the iPad.

Furthermore, the desire for Apple products has created an illicit industry of smuggling from Hong Kong and other places. Not long ago, authorities shut down a zipline stretching across the border from Hong Kong into the Mainland city of Shenzhen. Flying on that zipline was none other than shipments of  iPads. Women in overcoats concealing a body covered in iPhones and iPads have also been caught trying to cross the border between Hong Kong and Shenzhen.

In a country known for its knock off products, Apple products are worth the price of their authenticity (even if those real products are purchased in ‘fake’ Apple Stores). Given this fervor, the overwhelming reaction from Chinese Apple fans upon hearing about the passing of Steve Jobs is not surprising. Netizens took to Weibo (China’s ‘Twitter’) commemorating his contributions to the world. Others visited Apple vendors around the country to offer their condolences in person.

Steve Jobs’ popularity in China demonstrates a universal admiration for ground-up innovation and entrepreneurship. Despite having a reputation as a culture that discourages innovation and forces workers to ‘toe the line’ in order to maintain social stability, China’s rising living standards and gradual shift to consumer economy will create an environment more conducive to the kinds of innovations that have come out of places like Silicon Valley in the past.

American economist Panos Mourdoukoutas disagrees with this notion in a recent Forbes article (Why China Doesn’t Have It’s Own Steve Jobs). Mourdoukoutas cites the ‘nature of Chinese institutions’ and ‘lack of incentives to develop pioneering products’ as reasons for this being the case. While looking back at the past few decades, his observations might be correct, looking into the future, he could not be more off the mark.

As I have said before, China’s economy is in a constant evolutionary state. What may appear a static, archaic, and centrally controlled beast from the outside is certainly not reality within China. One only needs to look at the evolution of China’s neighbors, Japan and South Korea- both places once known as bastions of intellectual property theft- to get an idea of where China is headed in the innovation department. Only this time, the scale will be much larger.

Only once the country’s ‘hardware’ (infrastructure, buildings, etc…) is in place, will China make the full shift to a more consumer driven economy. Mourdoukoutas finally acknowledges this reality at the end of his piece:

“To have its own celebrated entrepreneurs, China must develop a consumer-centered market economy that releases the ingenuity and creativity of its people in the search for novel ways to change consumers’ lives, amassing wealth for themselves in the process.

On the ground here this is already happening, but the process might be too gradual for outside observers to see. If reverence for Steve Jobs is any indication, China is in for a golden age innovation and entrepreneurship…the people here are hungry for it.

Local Debt Adding Fuel to Bearish Outlook on China

Credit rating agency Moody’s recently released a report claiming that Chinese financial auditors have understated local government debt by half a trillion dollars. This is no small estimate, and the thought of so many non-performing loans on bank balance sheets is enough to make any seasoned investor bearish on China.

Of course, the majority of debt is fueled by lending that is going to local provincial and municipal governments and developers to fund new infrastructure and building projects. Banks are making these loans because of direct orders from the top-level of China’s central government. These orders were stepped up significantly after the 2008 world financial crisis to keep the country’s growth engine humming along as the export market fell off a cliff.

The New York Times wrote an article acknowledging that China’s building boom is stirring up fears of debt overload. To get a better understanding of the situation, the NYT examined the central China city Wuhan to see what the process of urban development entails from a financing standpoint.The piece does a good job of explaining how municipal governments often set up separate entities (state-owned) to help finance and construct large-scale infrastructure projects.

In the case of Wuhan, the city set up an entity called ‘Wuhan Urban Construction Investment and Development’, or Wuhan UCID. According to the NYT piece, Wuhan UCID “has over 16,000 employees, 25 subsidaries, and 15 billion dollars’ worth of projects, including roadways, bridges and sewage treatment plants.” Sun Zhengrong, a spokesman for Wuhan UCID, admitted to the NYT that the company is  heavily in debt.

China’s mode of development is contrary to everything that is sacred to Chicago school economists and free-market fundamentalists. If it were up to the ‘market’ to decide the fate of entities like Wuhan UCID, it should fail tomorrow because of its tremendous liabilities. There is no way that Wuhan UCID will ever be able to recoup its investment in things like bridges or sewage treatment plants because these kinds of investments don’t traditionally turn a profit.

Infrastructure investment is necessary for any developing economy. China understands this and is willing to take the risk of ordering its state-owned banks to make loans towards this type of investment (even if they are never paid back). In a sense, entities similar to Wuhan UCID (of which there are countless across China) and the state-owned banks lending to them are ‘too big to fail’.

When entities like Wuhan UCID do default on their loans, it is likely to dissolve into smaller pieces or restructure into something different to avoid the responsibility of paying them back. The ‘failure’ of these entities to pay back loans also ensures that the central government maintains control over local governments.

What about the banks? The reality is that China’s banks are nothing more than conduits for the government to spend money. They are in no hurry to recoup their loans- rather they have a longer view and see the hundreds of millions of new Chinese homeowners as a stabilizing force in the banking system (and the social system as well). China’s leaders also realize that the era of cheap labor won’t last forever, thus the rush to build the country’s infrastructure.

Property developers, whether state-owned or private, are also tools of the government, pressured into acting fast to build or risk losing land they had successfully bid on.

What are the implications for overseas investors? It is important, first, to acknowledge that the Chinese government doesn’t care about outside investment. Overseas companies who gain access to the China market do so because of the potential to acquire technical know-how. When it comes to banking and investment, China is very closed off. Foreigners have barely any access to the real estate market and China’s currency is still not easily convertible despite pressure from developed economies around the world.

The closed nature of China’s economy, as well as its huge foreign-exchange reserves, is a hedge against the potential damage that over-investment in urban development could cause. If there were to be a problem, China could always do more to open up to foreign investors to prop itself up again. China could also do a lot more to promote internal consumption, including float its currency and remove tax barriers on foreign goods.

The time for these measures has not arrived yet. Despite all the hype of being the world’s number two economy, China is still very much a developing country. Investment in infrastructure makes a lot of sense at this point given the how it will benefit the country now and well into the future.

China Linking Southeast Asia with High-Speed Rail

Kunming, Yunnan Province:   China’s Gateway to Southeast Asia

China receives a lot of well-deserved recognition for its expanding high-speed passenger rail system. Now China’s rail ambitions are extending well beyond its borders into neighboring countries. This April, construction is to begin on a rail line linking southern Yunnan province with the country of Laos to the south.

With cash in hand and the ability to build such a rail line, China is paying for the majority of the construction cost while Laos will only be responsible for 30% of the cost. This is yet another example of China exercising its policy of ‘infrastructure diplomacy’- that is, helping other developing nations pay for and build new infrastructure to promote favorable relations and gain access to natural resources.

China can now be seen practicing this form of infrastructure diplomacy in everywhere from sub-Saharan Africa to Central Asia and even South America. Yet nowhere are the implications of this approach to foreign policy more manifest than in Southeast Asia. This is not only due to the close proximity of the region to China’s southern border, but because Southeast Asian nations are about to undergo their own development transformations and China is looking to establish a  key role in the process.

China’s ambitions are so high in Southeast Asia in fact that the country hopes to someday link via rail all the way from Beijing to Singapore. Plans are also underway to connect China to Cambodia and Thailand. Much to the dismay of human-rights activists, China also has very good relations with Myanmar despite that countries questionable leadership.

Vietnam is a unique case in that their sense of autonomy is especially strong in the region. In particular, Vietnam does not shy away from criticizing China over overextending its claim over the adjacent South China Sea. Territorial disputes could arise, but chances are likely that Vietnam and China will find a way to work together that will mutually benefit one another.

In China, Kunming, the provincial capital of Yunnan, stands to gain tremendously from the growing ties with Southeast Asia. A city of about 3 million people, Kunming is already China’s gateway to the region and boasts a diverse array of minority cultures with historical ties to countries to the south. Though long relegated to 3rd tier status, Kunming is on the rise to become what will be an important international business and transportation hub for China and all of Southeast Asia.

GoKunming: Trans-Laos Railway Construction to Start in April

Monsters & Critics: Construction on Laos’ High-Speed Rail Set to Start in April