Urban Development on a Chinese Scale

We have all heard about the scale and speed of economic development in China. The high-speed train system, the highways that crisscross the country, the construction of subway lines at a rate found in no other country, and the development of commercial and residential areas. This posting is the story of such a development in Shanghai.

Shanghai is world renowned for its skyscrapers that easily match New York City. Often, people compare the two cities for their dynamism and their desire to eclipse each other. There is one area in which Shanghai surpasses New York; the speed of economic development.

Over the last 30 years, Shanghai has seen hundreds of high-rises go up. The skyline of Pudong is world famous. The second tallest building in the world is in Pudong. No building above 3 floors existed in Pudong in 1985. What a success!

UD 1Pudong skyline. Source: http://www.dronestagr.am/shanghai-pudong-skyline/

Now a new development is taking place further upstream the Huangpu River, within walking distance of the core of the city. It is called the Dong Financial City.

UD 2Dong Financial District is near downtown Shanghai, and the Pudong financial district. Source: Photo by author, illustration by Dong Financial City.

This development will include more than 25 high-rise buildings. It will be a mixed residential, commercial and office district. The area under construction is roughly 800 meters by 600 meters, which is an amazing surface area for a large city already well developed.

UD 3Map of development area in Shanghai. Source: Google Map and the author.

This development will replace dilapidated industrial, commercial and residential areas that have seen better days. It is reasonable to estimate that more than 5,000 people will have been displaced once this project is completed.

UD 4Neighborhood that will be demolished to make space for the Dong Financial City. Source: The author

Construction is already well under way with an army of more than 10,000 migrant workers that come from all over China. Having left their spouses and their kids behind, their life revolves around the construction site, having no money to enjoy the high quality of life Shanghai offers (monthly salary of 7,000 RMB (US$1,000)). These workers toil from 7 am to 6 pm, 6 days a week, often 7, returning home once a year. They live in 20-foot containers that are piled 3 high, 10 workers per container. Nearly 7,000 workers live in an area 130 meters by 70 meters. Showers are communal, as is the cafeteria. Entertainment consists of whatever they can get on their smart phones. When the work is completed, they need to find another construction site to work on or they will need to return to their town or village as not having their hukou (local residency permit).

UD 5Workers living accommodation. Source: The author.

Infrastructure for the site is already well on its way, including the construction of a wall along the river to cope with potential water surge due to a hurricane (called typhoon in Asia). An underground highway that completes the loop around the city core is almost finished.

UD 6Protection wall against water surge. Source: The author.

Construction is on-going on 15 or so buildings at difference stages of completion. Four identical office buildings are rising in unison across more than 300 meters. In a different part of the complex, it is 3 residential high-rises, 20-floor high where workers have just begun installing the windows. In another part, four foundations are being dug side by side with yellow cranes towering over the site. Trucks lift road dust as they take the soil away.

UD 7New high-rises near existing living areas. Source: Photo by author.

The first buildings will be completed by the middle of 2018. The demolition of the remaining residential areas will begin later in 2017. All residents will be relocated to the suburbs in apartments situated in newly built high-rises. Living in new areas, the people will not be able to benefit from the strong support of neighbours or the facilities that were found within walking distance. Friends will be dispersed all over the distant suburbs of Shanghai. Buses and subways will be available, but how useful will they be to individuals in their 70’s who used to walk 50 meters to see a dear friend in need of help. What will happen to the owner of a 2 square meter shop who mended shoes or watch straps, or a 5 square meter drycleaner? It is the fabric of a multi-generation society that evaporates as a city develops. No one can oppose the development as it is done for a greater cause; the modernization of the Chinese society.

UD 8New foundations and building skeletons near existing buildings. Source: The author.

The migrant workers who have built these high-rises, and the former residents of the neighbourhood will not be able to afford living in these newly completed apartments. At a cost of 50,000 RMB per square meter, a one-bedroom apartment of 70 square meters (760 square feet) will cost 3.5 million RMB (US$510,000).

UD 9Brand new modern district by the river. Source: Photo by author, illustration by Dong Financial City.

Shanghai will have a brand new district to show the world how advanced China is. No one will remember the work of the migrant workers who toiled for years, and the people who lived for generations in the same neighborhood.

Welcome to the high speed development of China.

Pierre

The Burden of the Past

MMACredit: Shanghai Daily

I posted a comment on a recent article in the New York Times.

The article titled “M.M.A. Fighter’s Pummeling of Tai Chi Master Rattles China” was published on May 10, 2017. To read it, click on Article. 

The reaction to the recent contest between the past (wushu) and the present (MMA) can be felt in China almost every day. Does the past define us, or should we consider the realities of the world we live in? 

Confucius, who lived 2,500 years ago, is advocated in China as the source of inspiration for the present, even if he had no constructive role for women, a high respect for the status quo and a belief in a highly hierarchical society. His philosophy is used by the current leadership to justify their approach on how to run China. 

TCM (Traditional Chinese Medicine) squares off against Western medicine, with the government heavily promoting TCM. Western medicine is heavily influence by the scientific method, while TCM believes in energy flows in the body that have yet to be proven scientifically.  

The 5,000-year old history of China might be a burden to the society as it excuses practices that should be questioned and in need of a scientific validation. The Age of Enlightenment has yet to reach China.  

This kerfuffle proves again the challenges of China to accept a scientific experiment against historical beliefs.

A reflection on societal values

TFBoysFrom left, Wang Yuan, Wang Junkai and Yiyang Qianxi of the Chinese boy band TFBoys performing at an awards ceremony in Beijing last year. Credit Imagechina, via Associated Press

I posted a comment on a recent article in the New York Times.

The article titled “In China, It’s the Party That Keeps the Boy Band Going” was published on May 6, 2017. To read it, click on Article.

Here it is:

I recently gave an assignment to my students who are in their second year at a national university in Shanghai. It consisted of writing a critical analysis on an editorial found in a well-respected western newspaper. A comment often seen was that the editorial was too negative. It lacked “positiveness”.

The source of this approach is based on the formation people receive all along their schooling and in the society at large. People are molded in a positive attitude towards society. That approach is not new to China as it can be found in the philosophy that Confucius advocated 2,500 years ago.

The same attitude can also be seen when Kennedy said: “Ask not what your nation can do, but what you can do for your nation.”

What is of concern is not this “positiveness” but the lack of a critical discourse. Unfortunately, the Chinese society and my students do not have the mental framework to proceed along this path. Hopefully, as the Chinese society matures this trait will emerge, implementing a constructive framework to critical analysis that the West often lacks.

Pierre

The value of time

Recently in a hotel, I asked an attendant at the front desk to call a taxi.

WalkingSource: Google Map

She asked where I was going. I told her the name of the temple I wanted to visit.

She replied that I did not need a taxi as it would be “only” a 40-minute walk.

Walking - Road Source: Unknown

It is amazing how different cultures measure distance and value time.

I ended up walking to the temple.

Pierre

Can Trump salvage the situation with China?

This text was written in response to the article “Trump’s Gift to China” published on April 4, 2017 in the New York Times (NYT). These comments were published on April 5 in the Comments section of the article. The NYT article is reproduced at the end.

Trump-XiSource: WatchingAmerica.com

“A deal in the making!

Can the US trade a favor for another favor from China? Limited options as the chips available are probably too important: South China Sea, trade and Taiwan. The US might stop interfering in the internal affairs of China. But this is of limited interest to China. If Trump is really serious about his “America First” approach, he might offer to disengage from Asia, in exchange for an agreement on trade. That is a possibility, however scary it might be for the “free-world”.

Can the US apply pressure on China? Commercially, any action taken by the US would be matched by China. This would hurt American companies that are involved in China through their supply chain or sales (i.e. Apple). Diplomatically, the US has weakened itself by withdrawing from the TPP, and has unsettled its allies with its blustering approach. Militarily, the US has a substantial advantage, but that would probably worsen the situation.

Alternatively, Trump might try the approach of being chummy with Xi. Unfortunately, golf diplomacy is too foreign to work with China. Maybe if Trump learnt to play ping-pong it might be the start of a rapprochement. The “art of the deal” does not work in China without a human rapport between the parties. And, currently there is no admiration for Trump in the “Middle Kingdom”. A jester will not get much respect from the polished leaders of China.

The Chinese are masters at the game of Go. Trump should read its guidebook before the USA is encircled.

Pierre”

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Trump’s Gifts to China

New York Times, Roger Cohen, April 4, 2017

SINGAPORE — The United States meets China this week in a position of weakness. Since taking office, Donald Trump has handed China a strategic gift by abandoning a trade pact designed to offset Chinese power in the region, been obliged to grovel after offending China over Taiwan, and turned President Xi Jinping of China into an unlikely poster boy for climate change concern and an open global trading system.

So much for the art of the deal; to Asian nations like Singapore worried about China’s aggressive territorial expansion in the South China Sea, American policy under Trump has looked more like a blink-first exercise.

Now Trump — having given the Japanese prime minister, Shinzo Abe, the full Mar-a-Lago – is obliged to give Xi the same at his Florida resort. (Angela Merkel, merely the German chancellor, need not apply.)

Top of the Florida menu is North Korea and how far China will help Trump in rolling back Kim Jong-un’s nuclear and missile program. The thousands of acres of new land built by China in the form of artificial islands or expanded reefs in the Spratly Islands off the coast of the Philippines — an extraordinary act of lawless territorial expansionism — will also be part of the discussions. Then of course there’s bilateral trade and Trump’s unhappiness with the $347 billion U.S. deficit last year — although with North Korea’s belligerent Kim now in a position to hit Japan, that feels like a manageable irritant in the symbiotic U.S.-Chinese economic entanglement.

China will not satisfy the United States on North Korea. Secretary of State Rex Tillerson has said “strategic patience” is over. But what does that mean? A pre-emptive American strike is nearly unthinkable given Kim’s ability to blow up Seoul. It sounds like what the Trump administration has specialized in: bluster. The Trump foreign policy doctrine: Shout loud and carry a little stick. When Trump tells The Financial Times that he can “totally” solve North Korea without China’s help, everyone shrugs at his saber-rattling.

China has leverage over Kim, but its “strategic patience” with him is infinite. Its priority is the survival of the totalitarian regime as a buffer. The dictator is China’s insurance against a nuclear-armed united Korea at its doorstep. Millions of North Koreans flooding over its border in the event of a regime collapse is the last thing China wants.

To Trump’s demands to deliver Kim, China is likely to shrug. Especially if the president (unlikely scenario) does what he should and tells Xi that China’s artificial-island push for regional dominance in the South China Sea is unacceptable.

In the long run any effective North Korea policy will probably have to begin with acceptance that denuclearization is no longer possible and stringent curtailment of Kim is the best bet. Diplomacy is a word that Trump might usefully add to his vocabulary.

For countries from Vietnam to Singapore, its absence has been alarming. Trump’s decision to rip up the Trans-Pacific Partnership, an ambitious free-trade arrangement including many countries in the region but not China, was reckless. China’s pressure on Singapore to choose between the United States and Beijing — something Singapore rightly refuses to do — is typical of the increasingly heavy-handed Chinese regional approach. With the T.P.P. dead, China is emboldened.

Already last year it had impounded some Singaporean military vehicles to signal impatience with Singapore’s close relations with Taiwan. It has also been critical of Prime Minister Lee Hsien Loong of Singapore when he raises concerns over China’s South China Sea aggrandizement. For the Chinese, “silence is golden” when it comes to all that new land for runways, radars and the like in waters far from its shore. But for Singapore, the sea is its lifeline. It cannot stay quiet; and it needs offsetting American power in Asia to keep those sea-lanes open.

Here we get to the nub of what should be on the Trump-Xi agenda. As Razeen Sally, an associate professor at the Lee Kuan Yew School of Public Policy, told me: “In the end it’s about free people and open societies. Are we going to have more or less of that in this part of the world? That is why more Chinese domination in Asia would be so ominous.”

But of course the Trump foreign policy is an experiment in a valueless, transactional approach to the world from which the American idea has been stripped.

Anthony Miller, an American businessman in Japan, wrote to me recently about a meeting with a senior Japanese university official who had asked him why Japan should align itself with America if there is no longer “a mutual belief in democracy, free trade and liberal values.” Miller concluded of Trump: “The damage he is doing to the underpinnings of liberal democracy is tremendous.”

When Lee, the Singapore prime minister, called Trump in early December he mentioned the free trade agreement between the United States and Singapore. The then president-elect, I was told, had no idea of its existence. Nor did Trump know that the United States has a trade surplus with Singapore.

Unpreparedness is bad. It’s worse when combined with bluster and recklessness. That’s why China is winning.

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Cultural gap between China and the USA

As the leading nations of the world, China and the USA need to interface frequently in order to discuss problems, and hopefully reach an understanding and finally an agreement.

In any discussion, the individuals from one nation will try reaching out to their counterparts from the other nation. Unfortunately, the framework of mental reference, not to mention the verbal and body languages, can be serious impediments to constructive communication. Therefore, it is important that the interlocutors be aware of these mental and behavioural differences, are able to recognize them and finally adjust to them.

Frustration MountFrustration mounts when we don’t get understood. Source: Reuters

Let us look at this cultural and behavioural gap that exists between nations, and particularly between China and the USA, and more broadly between the East and the West.

Since the 1970’s a series of studies have been conducted that try to characterize the average national cultural features. Three of the most commonly used models are from:

  • Geert Hofstede, a Dutch psychologist from Maastricht University in The Netherlands
  • Fons Trompenaars, a Dutch organizational theorist and management consultant
  • GLOBE (Global Leadership and Organizational Behavior Effectiveness Research) Project.

All these studies aim to characterize cultural behaviour across nations through a variety of aspects. At the core of each of these studies are a series of key behavioural dimensions that are graded towards two opposite poles. An example would the pairing between individualism and collectivism, where each country would be rated on this individualism-collectivism spectrum.

There are many shortcomings in these models as they do not intend to represent the whole range of human behaviours in a nation. They are only an approximation of key social behaviours. But, at the same time, these measurements can be the beginning in understanding the cultural gap that can exist between two nations.

We will use the model developed over the last 40 years by Geert Hofstede (www.geert-hofsted.com) to assist in our understanding of national behaviour. The data originates from a study done in the 1970’s of IBM managers located across the world.

Over the years this model was refined and extended to other countries. From the 4 dimensions, it has been expanded to 6 dimensions. The model also allows people to easily compare countries in order to identify potential behavioural challenges. By using the Hofstede model, comparing China with the USA, we obtain this graph.

Comparison of China and the USAComparison of China with the USA as per the Hofstede Cultural Model. Source: www.geert-hofstede.com

We can clearly see that of the 6 cultural dimensions studied, 3 have major differences. These might cause misunderstanding between individuals who might not be aware of them. Let us look at what each dimension aims to evaluate. All material quoted is from www.geert-hofstede.com.

Power Distance index: “This dimension expresses the degree to which the less powerful members of a society accept and expect that power is distributed unequally. The fundamental issue here is how a society handles inequalities among people. People in societies exhibiting a large degree of Power Distance accept a hierarchical order in which everybody has a place and which needs no further justification. In societies with low Power Distance, people strive to equalise the distribution of power and demand justification for inequalities of power.” Russia here achieves a score of 93 making it a highly hierarchical society.

Individualism versus Collectivism: “The high side of this dimension, called individualism, can be defined as a preference for a loosely-knit social framework in which individuals are expected to take care of only themselves and their immediate families. Its opposite, collectivism, represents a preference for a tightly-knit framework in society in which individuals can expect their relatives or members of a particular in-group to look after them in exchange for unquestioning loyalty. A society’s position on this dimension is reflected in whether people’s self-image is defined in terms of “I” or “we”.” It is to be noted that the USA at 91, has the highest score for the Individualism dimension among the 102 nations studied.

Masculinity versus Femininity: ”The Masculinity side of this dimension represents a preference in society for achievement, heroism, assertiveness and material rewards for success. Society at large is more competitive. Its opposite, femininity, stands for a preference for cooperation, modesty, caring for the weak and quality of life. Society at large is more consensus-oriented. In the business context Masculinity versus Femininity is sometimes also related to as “tough versus tender” cultures.” Often, the following analogy is used: in a high masculine society, people tend to “live to work”, while a low masculine society (i.e. feminine) people tend to “work to live”. Japan scores 95, while Sweden scores 5.

Uncertainty Avoidance Index (UAI): “The Uncertainty Avoidance dimension expresses the degree to which the members of a society feel uncomfortable with uncertainty and ambiguity. The fundamental issue here is how a society deals with the fact that the future can never be known: should we try to control the future or just let it happen? Countries exhibiting strong UAI maintain rigid codes of belief and behaviour and are intolerant of unorthodox behaviour and ideas. Low UAI societies maintain a more relaxed attitude in which practice counts more than principles.” Russia scores high again at 95.

Long Term Orientation versus Short Term Normative Orientation: “Every society has to maintain some links with its own past while dealing with the challenges of the present and the future. Societies prioritize these two existential goals differently. Societies who score low on this dimension, for example, prefer to maintain time-honoured traditions and norms while viewing societal change with suspicion. Those with a culture which scores high, on the other hand, take a more pragmatic approach: they encourage thrift and efforts in modern education as a way to prepare for the future. In the business context this dimension is related to as “(short term) normative versus (long term) pragmatic” (PRA).”

Indulgence versus Restraint: “Indulgence stands for a society that allows relatively free gratification of basic and natural human drives related to enjoying life and having fun. Restraint stands for a society that suppresses gratification of needs and regulates it by means of strict social norms.” This is where Mexico scores high with a 97.

The Hofstede model allows an easy cultural comparison between any nations. It can be used by corporations who are sending people to work around the world, as well as by governments who need to interface with other nation’s government.

Other individuals have tried to visually represent the differences between the western and eastern approaches. A book was written in 2015 by Yang Liu on that topic: East meets West. Originally from Beijing, the author has studied in Berlin, worked in Singapore, London and New York, and now teaches at the University of Applied Sciences in Berlin. As a graphic designer, she was able to visualize the differences between the eastern and western worlds.

Problem-solving approachApproach for problem solving in the West and in the East. Source: Yang Liu.

After looking at the overall group behaviour, we can also try to understand what motivates individuals, and this is where the work done by A. Maslow can assist us. A university professor, considered a leading psychologist of the 20th century, studied motivation in western individuals.

He developed a theory called the Hierarchy of Needs. This theory is taught in all business schools. If the same basic principles established by Maslow are used to determine the desires of individuals in an eastern society, we arrive at a different approach in how best to impact people’s behaviour.

Comparison of the Hierarchy of NeedsComparison of the Hierarchy of Needs between the West and Asia. Source: Unknown

The cultural gap between China and the USA is substantial and can be challenging. But, if our goal is to live in harmony, the leaders of the world will need to work together, and that means understanding how the other party naturally tends to behave. This gap must be bridged, and both parties need to work at it.

Bridging the Gap

Pierre

The extent of government centralization

As one endeavours to understand how the Chinese government operates, the word “centralization” will often come across in documents and discussions. All countries have a central government and to various extent regional political entities. The key question is, to what extent are the power relationship and the decision making process distributed between the various levels of government.

In China, there are 32 regional authorities (provinces, autonomous regions and municipalities) under the control of the central government. The provinces and autonomous regions are further divided into prefectures, counties, townships and villages.

In addition to the central government, there exists a range of national regulatory bodies which can issue directives that impact the lower levels of government.

Let us look at an article that was published in the Shanghai Daily on March, 7, 2017 as we try to understand the dynamic between the various levels of government.

_______________________________________________________________

Better toilets will help boost tourism

Shanghai Daily, Source: Xinhua, March 7, 2017

 Toilet at a Tourist Destination

CHINA plans to boost its tourism sector by upgrading infrastructure and giving the public easier access to travel information, a government document said yesterday.

The National Tourism Administration unveiled the plan in a development guideline for the tourism industry during the 2016-2020 period. It echoes the country’s national strategy to spur the service sector.

According to the document, roads to the country’s major tourist attractions will be renovated by 2020 to meet growing travel demand. Large tourist destinations will have easier internal transportation.

In the next four years, the country will add 20 inter-region bike lanes with a total length of 5,000 kilometers to boost zero-emission travel. More tour buses and recreational vehicle campsites will also open.

Toilets at tourist sites have long had a nasty reputation of being unhygienic. To address the problem, the country aims to install and upgrade 100,000 restrooms. Toilets at major tourist sites should apply stringent hygiene standards with environmentally friendly cleaning approaches at most facilities.

The document also outlines plans to build a more integrated information sharing system and provide visitors higher-quality services.

China’s tourism revenue totaled about 4.69 trillion yuan (US$689.7 billion) in 2016, up 13.6 percent year on year. Domestic tourists made 4.44 billion trips last year, an increase of 11 percent, official data showed.

Tourism plays a key part in the world’s second-largest economy as the country moves to build an economy driven by the service sector and consumer spending rather than trade and investment.

By 2020, the country will spend about 2 trillion yuan on the tourism sector, which will contribute more than 12 percent of GDP, according to the plan.

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Here are some points to highlight in order to explain the context of the document:

  • The National Tourism Administration is a quasi-governmental body at the national level which issues directives that lower government levels must implement.
  • The tourism industry was identified as a key economic development sector as the national government tries to re-align the economy away from “investments in fixed capital” and “exports”, towards “household consumption”.
  • The “2016-2020” period is the timeframe for “The 13th Five-Year Plan for Economic and Social Development of the People’s Republic of China”. The year 2020 is stated again in the last paragraph.
  • A budget in capital investments for roads for 2017 was released on March 5, at the National People’s Congress, two days before the article was published.

We can clearly see in the article that the central government will immerse itself in the minutia of governing when it impacts national objectives. It will not hesitate to provide detailed guidelines that all levels of government must implement.

It also indicates that the autonomy of the lower government levels is limited by whatever the national government elects to get involved in. There are few areas of decision that are entirely at the lower levels. If any action is undertaken by the lower governmental level, it must be validated by the national government, unless a national directive has been issued on that topic.

This most probably reduces the level of initiatives that are taken at the lower levels by government employees as they await decisions and directives from the national government. This is clearly a top-down government structure, not a bottom-up approach to governing.

Not a good way to encourage the development of initiative that has been identified as vital for the future growth of China.

Pierre

Netflix, Not in China

Netflix is in every country in the world except North Korea, Syria and China. For North Korea and Syria, it is easy to figure out why, but for China it is more complex. Let us have a look at what has prevented Netflix from entering China.

Netflix Around the WorldCountries where Netflix was offered in early 2017. Source: Business Insider.

Early on, Netflix knew that they had to proceed carefully with their efforts to enter China. They communicated extensively with the national government, interfaced with the proper government departments and studied the business landscape. They were determined to try to find a way into China with its population of 1.4 billion. Unfortunately, they encountered challenges that could not be resolved.

The first hurdle was regulatory. The Chinese government, similarly to western governments established a series of rules that govern what cannot be shown in films, on TV and through on-line streaming. Topics related to health (smoking, drinking, etc.), and sexuality have been extensively regulated in a large number of countries, including Canada, Europe and the USA. China, through SAPPRFT (State Administration of Press, Publication, Radio, Film and Television) has established a more comprehensive series of regulations. Here are the categories of topics that are banned:

  • Does not meet the national conditions and social systems, to the detriment of national image, endangers national unity and social stability
  • Damages ethnic groups unification
  • Violates the state policies on religion
  • Promotes feudal superstitions contrary to science
  • Exaggerates terrorist violence, or shows ugly behaviors that potentially induce crime
  • Contains pornographic or vulgar content
  • Distorts ethnic cultural traditions
  • Harms public morality, adversely affects minors

For each category, comprehensive details were provided resulting is many topics normally covered in shows produced in the West coming into conflict with these rules.

Like so many regulations in China, there is substantial leeway in their interpretation, making life more challenging for companies that need to meet those regulations.

These guidelines were tightened in early 2016, and affected foreign companies like Disney and Apple who both had been able to develop a market for their online entertainment content. Both saw their online services permanently interrupted.

Netflix could not find a way around these comprehensive regulations.

Netflix Regulatory ChallengesNetflix faced regulatory constraints in China. Source: Bidness Etc.

The other challenge that Netflix encountered was the strong desire from the national government to support local champions. Over the years, China has endeavoured to develop local companies in support of a “Made in China” policy that it frequently advocates. This policy is applied firmly particularly if the foreign company has no capabilities to improve the Chinese society. In this area, Netflix was not able to demonstrate that it possessed technology that would be of value in the Chinese market. Even if it had, Netflix would have had to follow the challenging content rules in order to obtain an operating permit.

Netflix - AlibabaNetflix and Alibaba squaring off in China. Source: Bidness Etc.

So, as with many other foreign internet companies like Twitter, Google, Facebook, eBay; Netflix will not be operating in China. Netflix has elected to license in-house developed programs to Chinese companies. But these will bring only modest revenues compared to being able to serve this large market. Instead, Chinese companies, like Alibaba and Tencent will continue providing on-line video streaming services as Netflix had nothing to offer that was of interest to the government.

Pierre

Note: For further details on the regulatory requirements, refer to: https://qz.com/630159/chinas-new-television-rules-ban-homosexuality-drinking-and-vengeance/, or to the original site in Chinese where one can use Google translation to obtain it in English: http://www.gov.cn/flfg/2010-05/20/content_1609751.htm.

Economically, is China no. 1 or no. 2?

Is China the leading nation with its newly acquired economic might, or is the USA still the economic leader? The economic forces that we will briefly analyse are the size of the economy, the level of international trading, foreign investments, and the financing provided to other countries.

Over the last 30 years, the economic growth of China has been phenomenal. The most talked about measurement to assess the economic might of a nation is the GDP (i.e. creation of economic wealth). The challenge in comparing countries is that the value of the GDP needs to be converted from the currency of the country into a common currency, generally the US dollar. Often the number that is used is the GDP at CER (Current Exchange Rate, also called Nominal), compared to the GDP at PPP (Purchasing Power Parity).

GDP at CER is the GDP in local currency converted into US currency using the currency exchange rate at the time the two countries are compared. The challenge for this method is that the currency exchange rate is at times established artificially and is often subject to rapid fluctuation due to external factors.

For 2016, China’s GDP was 74.4 trillion RMB. For 2016, the value of the Chinese currency was on average 6.6 RMB to the US$, while in early March 2017 it was 7.0 RMB to the US$. Let us convert the Chinese GDP from RMB into US$, for these two values.

  Value in trillion
  In RMB In US$
 

Rate of

Rate of

 

6.6

7.0

Chinese GDP

74.4

11.1

10.6

Comparison of China’s GDP at two different exchange rates.

We note that the value of the Chinese GDP has shrunk by US$0.5 trillion (11.1 – 10.6), while in fact, the actual GDP value has remained the same.

The comparison of the GDP at PPP uses the actual wealth generated in goods and services, and the resulting power of consumption that is compared between two nations. It is for that purpose that for an end result that better reflects the reality, the GDP at PPP is used. In the CIA Factbook, one of the most comprehensive accessible database that covers all countries, comments on the GDP for China read: “Note: because China’s exchange rate is determined by fiat rather than by market forces, the official exchange rate measure of GDP is not an accurate measure of China’s output; GDP at the official exchange rate substantially understates the actual level of China.”

The following table presents the GDP converted in US$ at PPP for the G20 nations.

gdp-at-ppp              GDP of the G20 countries in US$ at PPP. Source: CIA Factbook

We see that the GDP of China at US$21.3 trillion is the largest in the world, even exceeding the combined current economic might of the 28 states in the European Union. It also exceeds the GDP of the USA by almost 15%. In fact, China’s GDP surpassed the US GDP in 2015. No other country approaches the economic might of these two nations.

A country can also impact or influence another country through trade. By using data from the CIA Factbook for exports and imports, we see that China’s Total Trade value marginally exceeds the numbers from the USA. For this analysis, we have added to China a portion of the numbers for Hong Kong.

 

Export value

Import value Total Trade
  US$ trillion US$ trillion

US$ trillion

China (partial HK)

2.2

1.6

3.8

USA

1.5

2.2

3.7

International Trade for China and the USA. Source: CIA Factbook

Another manner in which a country can economically influence another one is through FDI (Foreign Direct Investment). There are two types of FDI: Outward FDI where companies in one country invest in another country, and Inward FDI where a country receives foreign investments. This table illustrates both types of FDI. The Inward FDI value, for China (including HK) in 2014 (232 US$ billion) matched what the USA received (US$231 billion). For 2013, China trailed the USA by 15%. For the Outward FDI, the USA leads over China with China rapidly catching up.

outward-and-inward-fdiOutward and Inward FDI. Source: UNCTAD

Lastly, countries can influence other countries by lending them money. In this case, the USA has historically been the leader. Recently, China pulled off an amazing feat by launching a competitive institution that rivals the US. Since the Bretton Woods Agreement of 1944, the global framework for the world economy was dominated by the leading powers at the end of WWII. With the rapid growth of China, it came knocking at those doors, which remained closed. So China decided to introduce its own international banking organization. In 2014, China launched the Asian Infrastructure Investment Bank (AIIB) with the implicit goal of rivaling the World Bank, which is indirectly controlled by the USA. The USA encouraged western nations not to join the AIIB, but it failed. By the end of 2016, the AIIB already had 57 member nations, with 6 more aiming to join.

So overall, where does China stand? Let us tabulate the above information.

 

China

USA

GDP at PPP

+15%

 Trailing

Trade

Slight lead

 Decreasing

FDI

Catching up

Slight lead

Foreign Lending

Catching up

Solid lead

Comparative information. Sources: Various

There is no obvious economic leader, but what is clear is that over the last decade, China has nearly caught up with the USA in all aspects of what can impact the economic might of a nation. With a population of 1.38 billion compared to 0.32 billion for the USA (4 times smaller), it is a sure bet that in the near future China’s economic might will exceed the power of the USA, and in fact will easily surpass the USA by the middle of the 21st century.

So the answer to our question is: “It can be said that China has the largest economy. But in terms of economic might, the USA remains number 1, but only marginally. Within a decade or so, China will have taken over that position”.

Pierre

What’s globalization all about?

Globalization has been a major topic of conversation for years. Recently, it became even more prevalent with the UK decision to exit the European Union (i.e. Brexit) and the election of Donald Trump as the president of the USA. Many countries are seeing a resurgence of populist politicians who embark on a discourse that clearly states that globalization is bad. We could examine the origins or the theoretical benefits of globalization but instead we will look at its global economic consequences.

Globalization has always existed, but its pervasiveness has drastically increased over the last 40 years with the development of new technologies. A simple way of quantifying the extent of economic globalization is to chart the historical evolution of Global Trade as a percentage to the World GDP (Gross Domestic Product) over the years. International trade is the calculation of the value of goods and services that transit between countries (i.e. the sum of exports and imports for each country). GDP is the calculation of the economic wealth generated in a country over a period of time, generally one year. If we add the GDP for each country, we obtain the World GDP. This graph presents the evolution over the years of this ratio (value of Global Trade / value of World GDP) since 1980.

global-trade-since-1980Economic globalization of the world. Source: BBC

This graph has three clear periods. The first between 1980 and 1993 sees a stable period. Between 1993 and 2008, we see rapid growth. Beyond 2008, there is a levelling. The change in the 1990’s is linked to the emergence of developing countries, particularly China, with the rapid increase of their role in becoming the production locations of the world. Since the 2008 recession, the world has seen a levelling of international trade, which is the result of a general economic slowdown, combined with protectionist efforts in some countries.

From 1993 to 2008, economic globalization increased by 50% (from 40 in 1993 to 60 in 2008). With substantially higher GDP growth rate in developing countries than in developed nations, many more jobs were created in developing countries than in the developed ones. This can be confirmed by analyzing the flow of Inward FDI (Foreign Direct Investments, i.e. productive investments entering a foreign countries), which is a source of new jobs in the countries that receive those investments from companies that are located outside that country.

fdi-inflows  Inward FDI, global and by categories of economies, 1995-2014 (Billions of US dollars). Source: http://www.worldinvestmentreport.org/wir2015/wir2015-ch1-global-investment-trends/

We first see that the flow of investments across nations has substantially increased over the years, confirming the on-going internationalization of economies. We also see that the percentage of Inward FDI allocated to developing economies has increased from roughly 38% to 55%. Let us see how this compares to the population by regions.

  Inward FDI by region Population
  1995 2014 Billion % of world
Developing Economies 38% 55% 5.9 81%
Developed Economies 62% 45% 1.4 19%
Total: 100% 100% 7.3 100%

Analysis by geographic areas. Sources: UNCTAD, CIA Factbook

It is interesting to note that in spite of the increase of Inward FDI into developing nations, from 38% to 55% (i.e. the creation of new jobs), it is not yet in proportion to their population. Developing countries want Inward FDI in proportion to their share of the world population, and at 55%, they are substantially short of the 81% that they want. This analysis explains why, generally, developing countries are avid supporters of economic globalization. A recent speech by China’s President (Xi Jinping) given at the World Economic Forum in Davos confirms China’s keenness to see the globalization process continue.

Two keys issues are often raised against globalization. The first issue is not that the absolute wealth of people living in developed countries has decreased but that their economic wealth has barely improved contrary to the substantial increase in developing nations. So, people in rich countries are dissatisfied to see their relative position weakened. This phenomenon has been identified in studies that indicate that individual happiness is often derived from the gap with our “neighbours”. People in rich countries see that individuals in poor countries are getting richer, but that their own economic position is not improving, and for a consumption based society, that is simply not acceptable.

The other issue is wealth distribution between individuals (i.e. the Gini Coefficient). On a world basis, the equality of wealth distribution between nations has substantially improved, but on a national basis, the equality has worsened. This is consistent across the world, affecting some countries more than others. For example, in China, in the 1980’s, everyone was equally poor, while in the last 10 years substantial economic inequality emerged. Gone is the equal society. The national government has acknowledged this situation and is working to correct it.

Overall, globalization has accelerated the realignment of the relative distribution of wealth. People in developing countries have benefitted from this realignment. People in developed nations have seen their economic position increase only marginally if at all. Therefore, relatively speaking, they are worse off. Welcome to the greatest economic realignment in the history of the world.

Pierre