Category Archives: Public Policy

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.

Urban Creative Culture, Air Quality and the Tragedy of Beijing

Beijing_Pollution

Like many foreign travelers and working expats who arrive to China, Beijing was my first port of entry into the country. Leaving Capital Airport I was struck by the massive scale of the city, overwhelmed by the repetitive concrete towers standing like regimented rows of soldiers in the skyline. Beijing’s urban form is undoubtedly inspired by the Soviet-era tendency towards grandiose urban planning schemes, but as I would come to learn the story on the ground painted a different, much more vibrant picture of urban life.

Beijing is not a city that one can fully appreciate in the matter of just a few days visiting the famous historical sites. In the space between gigantic attractions like The Forbidden City, Temple of Heaven, and Summer Palace, a modern grassroots culture thrives. Underground rock clubs, artist studios and independent coffee shops coexist in what’s left of old hutong neighborhoods as well as reclaimed industrial spaces on the periphery of the city center.

The notion of a burgeoning arts scene would seem to run counter to what many outside China still think of the city: that is, the seat of an oppressive Communist government devoted to quashing all personal freedoms. Although Chairman Mao’s portrait still looks ominously over Tiananmen Square, the perception of Beijing as a cultural desert couldn’t be further from the truth.

Arts and culture are engrained in the city’s urban DNA. Beijingers are rightly proud of their city’s long history as a cultural center, and its young creative residents continue that tradition today. Just as the infinite looping ring roads that surround the city conjure up images of Ouroboros (the serpent eating its own tail), so is the city itself in constant cyclical reinvention mode. The tremendous social and economic changes provide a fertile ground for artistic inspiration and creative freedom.

Yet there is one factor that undermines Beijing’s aspirations as a global urban creative center, and it is not the threat of government oppression. Rather, it is the layer of hazardous grey smog that envelopes the city on a regular basis.

When I first visited Beijing 2006 air pollution was already a problem, but not at quite the level it is now. When I returned to Beijing in 2009, this time moving to China for work, I noticed the pollution had become markedly worse. Thousands more cars were added to the roads and urban development was pushing out past the city’s distant 6th Ring Road. Today, the pollution levels are worse than they’ve ever been, with the density of PM2.5 particles reaching as high as 671 micrograms (or 26 times the level considered safe by the World Health Organization).

As someone with the fortune of being born in a country that is already developed and has established emission standards, I’ve been hesitant to criticize China regarding their development aspirations. Throwing stones from afar would be nothing less than hypocritical, as most developed countries also went through a “dirty phase” during rapid industrial expansion. Thus, the general tone of this blog is supportive of China’s urban development and the economic benefits it has created for the Chinese people.

Yet China’s environmental crisis is a serious threat to that process- and Beijing is ground zero for the country’s challenges. Beijing’s air pollution is a health problem for everyone in the city, regardless of class or economic status. It is an economic problem as much as it is a social problem: if the city’s residents can’t breathe clean air then urban life cannot continue to thrive. Pollution is also a real threat to urbanization, as crisis levels could prompt people to revert back to rural living despite economic opportunities offered by the city.

Encouragingly, the Chinese government has fully acknowledged that pollution is a problem and is taking proactive steps to address the issue. This includes everything from limiting the amount of automobiles on the road at any given time to decommissioning coal-fire power plants near the city.

Yet this is not enough- there needs to be a paradigm shift in the way China and other developing countries urbanize and grow their economies. This includes embracing more ecologically sensitive technologies in power generation and transportation. To incentivize using these new technologies, China is testing out a pilot cap-and-trade program in 7 cities (including Beijing). If successful, China will roll out a nationwide cap-and-trade program by 2016.

In the meantime Beijing residents will have to do what they can to stay healthy in the current environmental conditions. Sadly, until the air is cleaned up, Beijing may have to put on hold its aspiration as a global center of arts and culture, despite the exciting activity happening at the grassroots level.

Chinese Developers on the Defensive After Accusations of Tax Evasion

Beijing Residential Tower

As China’s state media increases its accusations of tax evasion, real estate developers are going on the defensive.

Last week, property tycoon Ren Zhiqian, Chairman of Beijing-based developer Hua Yuan Real Estate Group, posted  a message on Weibo (China’s version of Twitter) calling China state broadcaster CCTV “the dumbest pig on earth“.  This was in response to a program recently aired by CCTV accusing Vanke, another very large property developer, of owing more than 4.4 billion yuan (~$727 million USD) in unpaid taxes. The unpaid tax in question is the ‘land appreciation tax’ (LAT).

As a tax levied on the gains from the transfer of land development rights of state-owned land to real estate developers, the idea of the LAT is simple enough in theory but more complicated in practice. As explained in this South China Morning Post article from November:

“Land appreciation tax is collected by local governments, who have much leeway on deciding the actual tax rate. When a developer gets a pre-sale licence, it needs to pay a certain amount of land appreciation tax based on the asking price of the project. When the project is sold out, the exact amount of the tax will be calculated, deducting the cost of land, construction, marketing and other expenditures from the sales revenues, and multiplying the result by progressive tax rates.”

What this essentially means is that as a property developer increases the value of land through improvements and subsequent sales of housing units or leasing of commercial space, they need to pay a percentage of their gains to the local government. This is money due on top of what they already pay to the local government to bid on the land-development rights. The amount of money earned by local municipal governments in China on land sales is huge, accounting for about 30% of revenues.

Needless to say, as China has been going through its decades-long urbanization boom, local governments have not had to worry about a steady stream of money coming in from land sales.

Yet now China is at a tipping point.

With half the country urbanized, local governments are going to have learn to wean themselves off the land sales teat. There is also growing concern that local governments will not be able to pay back debts from loans taken out from state-owned banks used to fund the building of infrastructure.

Given this reality, it makes sense that the issue of land appreciation taxes is just coming to light. Don’t be fooled though- the accusations by CCTV are very calculated and a poorly veiled threat by the Central Government directed at country’s big real estate developers to “pay up”. It also creates a false narrative using developers as a straw-man to direct negative public sentiment towards.

No wonder Ren Zhiqian is livid.

It will be interesting to see how this plays out, especially since for at least the past 10 years developers have been the go-to guys for local governments in meeting their GDP targets (set by the Central Government ironically enough). As urbanization inevitably slows, tax laws will have to be reformed (and enforced).

Unfortunately, there is perhaps no easy way to make this transition. Clearly broadcasting exposés on state-run media against the country’s developers is only adding fuel to a potentially bigger fire.

Organic Farming in China: Chengdu’s Anlong Village

With the ongoing spate of food safety scandals, Chinese consumers are rightly weary of the source and quality of their food. Unfortunately, food quality regulatory bodies in China remain unreliable and direct access to fresh food sources is limited for an increasingly urbanized populace. This is one of the great contradictions of China’s urban development: a country which for most of its history was majority agriculturally based is on the fast track to be one of the most urbanized nations in the world.

Status conscious Chinese urbanites would rather not associate with anything related to farming, as it evokes the recent memory of rural peasant life. For many upwardly mobile city dwellers, international restaurant chains like KFC, McDonalds and Pizza Hut are considered the best options for upper-class ‘healthy’ dining (that is, food with high caloric content).

The urban growth of China is a boon to these chains as more American consumers shun them in favor of a more organic, natural diet. The shift in American consumer preferences is reflected in the success of supermarket chain Whole Foods, local farmers markets, and the growing popularity of the Slow Food movement.

Given China’s new-found love affair with processed food and growing ambivalence about the role of agriculture, I was confident there was probably not much interest in organic farming. That was until I visited Anlong Village- a wholly organic, zero waste farm 50 km northwest of central Chengdu. With a full-time population of 3,000 residents, Anlong Village is sponsored by the Chengdu Urban Rivers Association (CURA), a local non-profit NGO.

Anlong Village was initially set-up in an effort to help clean up the Funan River, which flows into central Chengdu

Anlong Village is CURA’s flagship project, and unlike other purported ‘eco-cities’ under development in China, lives up to its claim of being 100% sustainable. The partnership was established in 2003 as an effort to help clean up the adjacent Funan River, which flows through central Chengdu, after it was discovered that most of the river pollutants come from agricultural runoff upstream.

Anlong helps abate this problem by avoiding the use of chemical pesticides and instead using natural methods to fight agricultural pests. These methods include surrounding plots with mint (a natural pesticide) and planting garden plots with a variety of different species (so if one crop succumbs to disease, it does not destroy the entire plot). This not only avoids dumping unnatural chemical waste into the river, but ensures that the farm’s soil is nurtured over the long-term.

The village also features a comprehensive composting system. Composting toilets turn waste into organic fertilizer and animal waste is recycled into concrete pits treated with anaerobic digestive microorganisms that convert it into methane gas used for heating and cooking. Plant waste is also re-used as organic fertilizer.

Organic waste is mixed together in large pits and composted naturally before being re-used as fertilizer

Throughout the village, greywater is treated in a series of specialized ponds that naturally remove pollutants. Treated greywater can then be re-used for agricultural irrigation. Constructed wetlands adjacent to the Funan River also treat greywater, assuring that potentially harmful waste water is filtered before entering the river.

Constructed wetlands treat greywater, naturally removing pollutants

Despite the initial apprehension of local government officials, Anlong Village is a tremendous success. Of the few plots available to non-Anlong residents (primarily health conscious families living in the city who tend to their crops on the weekend), demand outstrips supply.

Demand is also great for the organic produce grown in Anlong. This is in large part due to Chinese consumer mistrust of the validity of produce labeled ‘organic’ in large Chengdu supermarkets like Wal-Mart, Carrefour, or Isetan. Anlong, on the other hand, offers a trustworthy source.

Unfortunately, at this point there are very limited formal distribution channels for purchasing organic produce grown in the village. Farmers frequently venture to the city to sell their crops, but usually only those ‘in-the-know’ will know when and where exchange points are. To make it a bit easier for consumers, CURA is currently in the process of training Anlong farmers how to use microblogging sites to announce the time and location of exchange points.

An outdoor dining hall in Anlong Village. The 100% organic & vegetarian lunch I ate here ranks up as one of the best meals I’ve eaten in China

In its relatively short history as a 100% organic farm, Anlong Village is already a benchmark for other aspiring sustainable farms around China. Yet like in the U.S., there is ongoing debate about the scalability of such a model. Considering the high markup on price compared to commercially farmed crops (produce grown in Anlong can be two to three times the cost of commercially farmed produce), many argue that this method of farming is not practical to feed a nation with such a huge population as China.

In spite of this debate, and given China’s struggle with pollution as it continues to develop, Anlong Village is a blessing and a valuable reminder that practical steps can be taken to protect its environment.