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Rule of Law: “Nice While It Lasted”

The US Congress has decided that Huawei is “a threat to US national security” by the US House Intelligence Committee. Huawei has issued a swift rebuttal.

Apparently the US House Intelligence Committee has decided that Beijing is the US’s enemy, and wants to have a say in US foreign policy.

Never mind that the US has developed a very complex virus to target Iran’s nuclear program. That’s it. End of story. No more questions. Please move along.

China telco and PR consultant David Wolf has an interesting take on the story which is worth reading.

NO ANCIENT WISDOM, NO FOLLOWERS: The Challenges of Chinese Authoritarian Capitalism

In other news, longtime China watcher James McGregor is soon publishing a book on China called “No Ancient Wisdom, No Followers: The Challenges of Authoritarian Capitalism” in which he lets go on the Chinese version of authoritarian capitalism. He has recently published his take on China on Yale Global Online; you can read the article here.

After serving with Dow Jones China, then the US Chamber of Commerce in Beijing, McGregor has most recently served with APCO, a lobbying and PR firm in China. My guess is that he will be leaving China soon.

One Billion Customers: Lessons from the Front Lines of Doing Business in China

Earlier, in 2005, McGregor published another book titled “One Billion Customers, Lessons from the Front Lines of Doing Business in China” which was very optimistic about China’s future as a consumer society and economy. Apparently his views have taken a 180 degree turn.

Just a few years ago, China’s authoritarian capitalism was praised in the west, but now that there is a slowdown, it’s amazing how quickly opinions can change. The party hasn’t changed much.

Apparently, the west and western public opinion are running out of patience. No wonder the Chinese complain about westerners having no patience!

In 2007, I predicted that globalization and rule of law would disappear in a heap of recrimination from all sides. As usual, my trend prediction was good, but my timing was way off.

You can purchase either of McGregor’s book for immediate delivery by clicking on the image links above.

Book Review: Designated Drivers, How China Plans to Dominate the Global Auto Industry

Designated Drivers: How China Plans to Dominate the Global Auto Industry

It’s hard to write a good book about modern China. Even though China is an infinitely complicated country and market, editors and publishers constantly pressure would-be authors to deliver everything so that the reader feels that he has a good grasp of what is happening in China. The result is usually a dumbed-down book, which either praises China to the skies, or goes in the opposite direction, and predicts its imminent demise.

Of course, the truth is somewhere in between. Greg Anderson, in his PhD thesis at UCLA, tried to tackle the complicated and under-reported issue of the role of the Chinese government in setting auto industry policy. A publisher expressed interest in publishing it as a book, and the result is Designated Drivers: How China Plans To Dominate the Global Auto Industry.

If you are looking for a simple book which says that it will succeed in dominating the global auto industry, or that it will fail miserably, then this book is not for you. Instead, the author takes some time to introduce the thinking behind the policy. A very nice aspect of this approach is that after you understand Chinese government policy, it really makes perfect sense and is easy to comprehend. Essentially, the Chinese have followed the western model of auto industry development, but want to do it faster, and want the Chinese government and ruling Communist party to play a kingmaker role. Using the powerful resources available to government, it has been able to set a clear general direction, with private companies expected to fall in line behind it. But, as you will see, the Chinese companies are not nearly as domesticated as one would think. These companies are sometimes willing to act against Beijing’s rules if they feel that there is advantage to be gained, or if they get provincial government backing.

Just like in other areas, China is preparing huge production capacity to dominate. The danger is that there will be excess production capacity, especially if westerners deem private auto transportation and private car ownership to be less important and demand drops. There are already signs that this is happening with younger Americans and Europeans. If this happens, Beijing hopes that at least some of the slack will be picked up by China’s rising urban middle class, many of whom see the private automobile as a transportation device and a status symbol.

Right now, what must be causing many worries in the auto industry is whether the current slowdown which is hitting China will be swift and short, or whether it will be prolonged. If it lasts longer, many Chinese auto makers will be in trouble.

It would be very interesting if the author revisited the subject in another volume in five years’ time, to see how the auto industry has adjusted to modern challenges.

Designated Drivers is available in both hardcover and Kindle formats. You can buy it from Amazon by clicking on the bookcover image above.

Gift-giving for money-laundering

Gift-giving is very important in Chinese personal and business etiquette, but in contemporary China, it has twisted into a form of bribery and money laundering, and creating a huge underground economy which is untaxed, even though all government officials and business people participate in it. Tea Leaf Nation has translated an infographic from Sohu Business which demonstrates the scale of this underground economy, which is larger than the national economies of many smaller nations.

You can see the infographic here.

The Hidden Rules of China’s Gift-Giving Business Culture

In China, you never visit someone and ask for something without bringing gifts; this goes for private favors among friends and official business. Failure to follow this rule of Chinese etiquette is one reason many business deals fall through.

Illuminant Partners, a Beijing PR agency, has recently designed a downloadable infographic which outlines some general rules to follow when thinking of purchasing gifts.

You can read about these rules and get the info graphic here.


The Trouble With China’s Official Urbanization Rate

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One of the most commonly used macro economic indicators to highlight China’s dramatic growth is the rate of urbanization. There are several reasons for this indicator’s popularity among several different constituencies:

  • Chinese government officials like it because it shows how quickly China is becoming a developed nation, which in turn means that China should have more power in many international bodies.
  • For Chinese state statisticians, it is a simple number which non-statistical people, especially Chinese government officials, can grasp onto.
  • For investors in real estate and real estate developers, it is a simple number which suggests that the cooling in China’s real estate market is only a temporary setback, and that it will pick up soon again.
  • For private equity fund managers, this makes the strong case that Chinese city-dwellers will evolve into a prosperous new middle class, and that the companies they will invest in are well-positioned to benefit from China’s urbanization trend.

In order to underscore China’s urbanization as a long-term trend, in May 2012, the Chinese government announced that 51.3% of China’s population now live in cities. This number is both historically and statistically significant, because it is the first time in China’s history that China has become a majority urban city in terms of population. Up until the past 30 years, more than 80% of China’s population were rural, and an important component of China’s economic reforms were focused on turning China into a majority urban nation. After all, isn’t economic development all about having a majority urban population?

A recent article in Caixin questions the reliability of the 51.3 percent claim. The main thrust of the article is that China’s household registration system needs to be reformed, and if the number of migrant workers living in cities were deducted, it would shave at least 10-12 percentage points off the “official” urbanization rate. If we are going to be aggressive, and deduct 12 percent from the official urbanization rate, that would mean that the real urbanization rate is close to 39.3 percent, which is still a very impressive number, even if it is quite a bit off from the original claim.

The trouble with including migrant workers in the urbanization rate total is:

  • Migrant workers living in the cities do not have the money to buy urban real estate, nor will they become part of the Chinese urban middle class. Most of the time, they are saving money to build homes and retire in the countryside.
  • Migrant workers are a kind of floating population which will most likely stay in the cities only if they have steady income from performing unskilled labor. If they are unable to find work, the benefits of living in the city rapidly disappear for them, and they will most likely head back to their home countryside.
  • Chinese city governments have used the household registration system to legally discriminate against non-residents (migrant workers) by not providing services to them. If they were forced to provide city services to non-residents, it is likely that the migrant workers would concentrate in certain districts, quickly forming into low-income ghettos. For this reason, many municipal governments are resisting pressure to reform the household registration system. This, in itself, is a strong argument against reform of the widely criticized household registration system. It’s a bad system, but it works.

In fact though, the real urbanization rate is likely even lower than 39.3 percent. This is because of the growing presence in the cities, especially tier one cities, of the “ant tribe”. Basically, the ant tribe is made up of recent university graduates who have headed to the cities for education, and stayed, in the hope that they would become white-collar workers but have fallen short in their job expectations. You can read more and watch a documentary about the ant tribe here.

Like migrant workers, the ant tribe is another group which will not buy urban real estate, nor will they become part of China’s growing urban class. The big difference between migrant workers and the ant tribe are:

  • Migrant workers are older and did not have skills. They wanted to save money to educate their children.
  • The ant tribe, in almost all cases, are the only child of migrant workers or the children of rural residents who did well in their studies. Many are carrying the hopes of their parents and grandparents, but haven’t made it up into the urban middle class. A significant number will, tragically, commit suicide but the larger number will return to the countryside after failing to make it in the big city. Don’t be surprised if you find that the majority of farmers in Hunan in 5-10 years have university degrees!

If we estimate that the number of the “ant tribe” at 6%, then that knocks the urbanization rate down to 33.6%, or 18% lower than the official rate of 51.3%. So what does this tell us about China and its future?

  • China is still a majority rural country; city population rates have been artificially inflated by China’s rapid economic development. The 51.3% claim borders on slapstick.
  • As the economy slows, more of these people will head back to their homes in the countryside, meaning that urban growth rates will slow, or even reverse.
  • Even if China’s urbanization rate is closer to 33.3%, that is still a significant number. But it’s not nearly as impressive as what the Chinese government and its statisticians have claimed.
  • The main engine of China’s rapid rise in real estate prices, blind construction and urbanization without any clear ways to create jobs, are gone, and are unlikely to come back.
  • Competition to live in cities, and the rich/poor wealth gap are likely to grow even further.

Perhaps the greatest single challenge for Beijing is that there is almost nothing they can do on the policy level to address any of these issues. At best, they can only hope that the economic downturn doesn’t last long.

China Manufacturers’ Survey Shows Shift To Developing Markets

Facing stagnant developed markets in North America, Europe and Japan, Chinese manufacturers and suppliers are shifting away from the traditional developed markets in the west, and more than 55% are actively developing new customers in developing markets.

China manufacturers' survey (Global Sources)

China manufacturers optimistic about developing markets

According to the survey by Global Sources, which covers the period from July to December, Chinese manufacturers continue to be cautiously optimistic. This is very much in contrast to the markets of the United States and European Union, which are showing slow, if any growth at all. The survey reinforces the trend that growth in the West will be slow, and the major growth focus will be in other markets.

The survey says that Chinese are most optimistic about South America, especially Brazil. In the next four years, Brazil will be hosting two major sporting events: the FIFA World Cup for soccer/football in 2014 and the Olympics in Rio in 2016. Both events are expected to provide a major boost to the Brazilian economy, and raise the country’s international visibility. Earlier this year, Brazil overtook the UK as the world’s sixth largest economy.

China now has the world’s second largest economy, behind only the US. In some sectors such as auto manufacturing, it is already the world’s leader, ahead of even the US.

Compared to economic surveys from the US and Europe, this survey is more optimistic about the outlook for China’s manufacturers. To read the full survey, please go here.

China’s Invisible Battle Over the Economy

There has been a lot of interesting debate recently; mainly between the China bulls and the China bears.

While this is an interesting debate for economists, it is not the real debate for Chinese government officials and business people in China.

The real issue is that costs are getting high in China, and profits for many companies are wearing thin. In an unregulated company, this would mean that companies would lay off people in order to cut costs. But China’s economy is highly regulated, and the performance of Chinese officials is measured by the numbers of people they keep employed. Since China doesn’t have unemployment insurance, the costs are passed on to businesses. In recent years, this has been turned into legislation on the national level with the Labor Law, which makes it very expensive, especially for non-Chinese companies, to lay off personnel.

In late 2008, when the global financial crisis broke, local government tax offices in China routinely visited larger employers to find out about their employment situation. The implicit threat was that if they laid off people at this time they would be inviting a tax audit which obviously would not work in management’s favor. Employers struggled, but the economy recovered, and through 2009 and 2010, it looked like China’s economy had dodged the bullet.

This time, it’s different. China’s domestic growth and consumer spending have continued to grow. If there are significant layoffs though, it will hit Chinese consumer confidence hard, especially when people hear stories about other people being laid off from their jobs. Immediately, Chinese will go into savings mode again, which will put a damper on domestic economic growth.

Now, the real battle which is going on will be

  • Between local companies and local governments
  • Between local governments and Beijing

Now, local officials are again visiting local companies to make sure that they don’t lay off employees. But this strategy won’t work well for many factories which depend on export sales, which are anemic and where margins are razor-thin. They will not want to continuously pay the wages of workers who have nothing to do. Soon, they will turn to local governments to ask for “incentives” to keep these workers on their books. Where will these cash incentives come from?

Local governments will increasingly turn to Beijing for monetary and/or fiscal relief so that these companies can keep the workers on their books, forcing Beijing to decide between bailing out these companies, or letting them lay off workers. Local government debt levels are already high in China, can Beijing afford to “lend” more which most likely will never be repaid? Please keep in mind that many of these employers will be state-owned enterprises with huge payrolls, which have been hugely profitable while China’s economy is growing, but will quickly turn into big money losers when China’s economy slows down.

What will Beijing do?

At the same time, within the party, officials will press within the party to stop using employment statistics as a KPI (key performance indicator) for measuring the performance of local officials. If employment statistics are no longer used, then local governments will have to quickly switch over to local tax collection to fill in whatever holes have been created. This, in a society, which doesn’t have a strong tradition of paying taxes or even honestly reporting them.

When the China bulls and bears debate, they are just debating the rate of the slowdown, not the general trend direction. They agree on the trend, and it’s not good.

The questions are how investors, business persons, local governments and Beijing are going to resolve these issues? It won’t be easy for Xi Jinping when he becomes president later this year.


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I have been spending more of my time on Quora, where I have asked and answered many questions relating to China. If you have not already, I would encourage you to follow me there. In order to do so, just click on the following button.


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US, China CO2 Emissions Compared

This is an excellent motion graph comparing US, China to 2006. To get a good idea of the trend, it’s best to set the slider at the bottom to begin at 1960, since much of the data before then is too old and insignificant to be of much interest. Then hit the “Play” button to watch the trend unfold.

If there is a shortcoming, it’s that the data ends at 2006. In 2008, 2009 the western economies went through a major contraction, and China’s stimulus package helped Chinese factories to continue to operate at a high level of capacity while the OECD economies slowed. So what has happened to carbon emissions between 2006 and 2011, the time of writing for this article?

Fortunately for us, the folks managing the Datablog at The Guardian, have not only posted the information up till the end of 2009, but have also created a graphic.

A few interesting takeaways:

  • China’s CO2 emissions at the end of 2009 were higher than the US, Canada combined.
  • CO2 emissions are falling fast among the OECD countries, which have suffered slow to negative growth following September 2008
  • The main CO2 culprit is China and other developing nations, not the OECD nations
  • The big challenge for China’s leaders is how to maintain economic growth and social stability, while keeping CO2 emission within “acceptable parameters”
  • Does the Chinese government have a definition of acceptable CO2 parameters? Or is this a slider parameter which changes according to social, political conditions?
  • There are other factors at work, such as north China’s drought. Droughts put a strain on other resources, which means that CO2 emissions are likely to go up even faster.

This is all something to think about.

Should The US Even Discuss Human Rights With China?

In the US, different constituencies like to focus on different issues, not realizing that Chinese tend to see issues as a whole, with everything connected in one way or another.

President Obama has said that he intends to draw a harder line with China on human rights, and recently invited some China human rights experts to discuss the issue with him.

At the same time, former vice president Cheney said that the Obama administration had come around to its hardline point of view on the war on terror, and was now following closely in the Bush administration’s footsteps.

The problem here is that the policies that the US has done in the Bush version of the global war on terror have made the Chinese government’s human rights violations look small in comparison. Many Americans would contest this view, but the better part of diplomacy is about being able to understand how others view issues in our globalized world.

If this is indeed the case, then Obama is at a distinct disadvantage in even bringing up the issue with the Chinese president, and should even consider not broaching the subject. Bringing it up would get a quick rebuttal from the Chinese president for its own human rights violations, and helping him to win points with Chinese, and the current and future Chinese leadership, for standing up to the US’s interference in domestic affairs.