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

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

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

An amazing feat

Over the last decades, China has achieved a drastic reduction in the number of people living below the poverty line. In 1981, 88% of the population was living below that line. That number now stands at 4%. The poverty line is defined as a person living on less than $1.90 a day, using 2011 $ at purchasing-power parity.

This amazing achievement has been accomplished since the economic restructuring that began in 1978, and has continued uninterrupted since. Per capita annual income has increased from $200 in 1990, to $5,000 in 2010, and has continued to improve.

Poverty reduction occurred in stages. The first stage happened in the rural areas with the introduction by the central government of the Rural Responsibility System which allowed families to produce more than their allocated production quota. The additional production was sold on the open market at market prices.

The second stage was the progressive opening of the Chinese economy to foreign direct investments (FDI) that created a multitude of enterprises geared towards exports, capitalizing on the low cost of labour. This had the impact of creating a large number of unskilled positions that brought many people into well-paying jobs in an urban setting.

poverty-level*Living below $1.90 a day, using 2011 $ at purchasing-power parity. Source: The Economist

In the early 1990s, the central government privatized small and medium size State Owned Enterprises (SOE’s) removing the rigid constraints of a centrally planned economy and placing these companies in a market economy. Once subjected to the forces of the market, millions of employees were laid-off, but within a few years many more jobs were created due to the innovative needs placed on the new owners.

In parallel, in 2001 China joined the WTO (World Trade Organization), accelerating the economic development of the country. Many more foreign enterprises elected to establish a facility in China, again adding a large number of jobs in an urban setting. By now, local entrepreneurs had also started creating employment opportunities.

By the turn of the century, at least 200 million people had been lifted out of poverty. In the next 10 years, another 200 million people would follow, as the economic expansion continued. By 2014, a total of 700 million people were lifted out of poverty, leaving only 4% in economic difficulties. These last 55 million people are now the focus of the government.

The efforts to continue reducing poverty is one of the key objectives of the government 13th Five-Year Plan period (2016-2020). The goal of the central government is to eradicate poverty by focusing on the 128,000 poor villages and 832 poor counties, predominantly in rural settings, in provinces located away from the coastal zones. In addition to focusing on economic conditions, the government is aiming to increase the quality of education, health services and housing.

The prime strategy to address these challenges is to encourage the development of competitive industries such as tourism and agriculture. In regions with limited economic development potential, residents will be moved. People will be relocated to areas which have greater economic possibilities. In addition, the government will introduce a guaranteed basic living standard for people unable to work.

gansuTourism features as a key economic tool in Gansu province, which has a GDP per capita at half the national average, and 4 times lower than the leading areas. Source: chinatouristmaps.com

In spite of these successes, different challenges were created as a result of this rapid economic growth. Probably, the greatest social challenge in China is the economic inequality that currently exists. In the 1970s, everyone had roughly the same economic level; more or less everyone was poor. As economic growth accelerated, and the economy moved from a centrally planned to a mixed economy (i.e. a combination of centrally planned and market economy), inequalities emerged. People who had post-secondary education were able to command higher salaries. Entrepreneurs were able to start businesses that rapidly flourished. Others were able to benefit from the privatization of small or medium size SOE’s. These groups of people raced towards reaping the benefits of rapid economic growth while the individuals with no or limited access to these capabilities progressed at a much slower pace.

Another challenge created by the central government relates to the partially deregulated liberty of movement. The Household Registration System (hukou) or similar methods have always been a cornerstone of the Chinese government’s desire to control the internal movement of its citizens. In the late 1980’s and early 1990’s people were given the opportunity to relocate but without establishing a permanent residency in their new location. This allowed this floating population of roughly 250 million people to move from rural areas to cities in search of better paid work. As these people did not have the hukou in the city where they worked, their children and at times their spouse had to remain behind. This has created a diaspora across China of broken families that are only reunited for 5 to 14 days, once a year during the Spring Festival (i.e. Chinese New Year) held in January or February.

Both challenges are being addressed by the central government but at a rate that will see these inequalities solved at a slower pace. By 2020, it is quite probable that the poverty issue will have been nearly resolved, but the problems caused by the substantial economic inequalities and the large floating population will probably take longer.

Pierre

The omnipresence of Western culture

In the West, we discover Chinese culture through our enjoyment of Chinese food and the occasional exposure to philosophers (Confucius), medicine (acupuncture), martial arts (Kung Fu) or films (Crouching Tiger, Hidden Dragon). Otherwise, little is experienced of the culture of the Middle Kingdom.

chinese-movieSource: IMP Awards

On the other hand, when Westerners arrive in China, they are surprised to find Western culture so pervasive. Let us explore the extent of this cultural presence.

Upon arrival at the airport, one will note that the male or female models used on billboards are often from the West. Frequently it is to promote a Western brand, but quite often it is used for Chinese products. The use of a Western model can often be explained by the desire to position the product or service at a high-end level, enticing Chinese consumers to achieve the material wealth and ease available in the West.

As the person journeys further into China, the names on a substantial number of stores will be familiar. Often Western companies have identified the Chinese market of nearly 1.4 billion potential consumers as a market that is worth pursuing, in spite of the many challenges that they will encounter. American and European labels will lease many locations in shopping malls, at times occupying more than 25% of the retail space.

hmSource: Nelson Ching/Bloomberg News

American fast food brands have a strong presence across China as well, with KFC (>5,000 locations), McDonalds (>2,000) and Starbucks (>1,600) leading the way.

kfc-mcdonaldsSource: Wikimedia

As the days go by, one will notice the less obvious manners in which Western culture is present. Western music will often be played in public locations, even in Chinese restaurants. Western artists will tour the largest cities to capitalize on being well-known and liked. Billboards will advertise the latest Hollywood action movies. These movies will generate hundreds of millions of dollars annually in a market that will become within a few years, the second largest market, after the USA.

harry-potter

Source: AFP Photo / Frederick J. Brown

One will also be amazed at the number of people who have a decent notion of English. It is estimated that around 300 million Chinese are learning English. Some in a formal setting like schools (public or private), while others will do it on their own. Their goal will be to capitalize on Western opportunities, might they be work related or personal.

As one stays longer in China, further cultural influence will be experienced starting with the introduction of Western holidays. For Halloween, stores offer masks and outfits. On the evening of October 31, thousands of adolescents disguise themselves and go for a walk in the downtown core of major cities. In late November, it is common to see retail stores or banks posting “Merry Christmas” signs. Stores like Walmart and Carrefour offer Christmas trees and decorations. Commercial streets are lit up, encouraging shoppers to purchase gifts for family and friends.

As one talks to Chinese friends, a key topic of discussion is the education of their child (i.e. 1-child policy). Chinese parents take this topic very seriously, and as a consequence, foreign schools are often a preference, if the parents can afford the substantial annual fees, often equivalent to one-year salary of a well-paid individual. American and British schools and universities have established Chinese locations that use the curriculum and teachers from their home countries.

shanghai-american-school

Source: Shanghai American School

In the field of literature, it is frequent to see a book or a play in its original version or translated in Chinese. Through these, Chinese people are exposed to Western values portrayed by the likes of Shakespeare, Molière, Dickens, Hugo, Hemingway and others.

shakespeareSource: British Council

As one further expands its reach into the Chinese society, Western culture becomes more subtle. The presence of many multinationals operating in China and the actions of multiple NGO’s (Non-governmental agencies) further spreads the cultural influence of the West.

Where is the cultural dynamic between China and the West heading? The first observation is that at this time, the flow of cultural influence is highly unbalanced in favour of the West. This has been the case for as long as China and Western countries have interacted. How will this change in the coming years and decades? At this time, it is reasonable to believe that the material wealth, creativity, openness and social dynamism of the West will probably continue to exert pressure for the continued dominance of the West. For this balance to be more equal, substantial changes would need to occur in China.

Meanwhile, the government is fully aware of the cultural dominance of the West and is taking actions to regulate the inward flow. Strict rules have been placed on the number and the content of films allowed in the country. For foreign corporations, a series of rules clearly delineate their areas of activities, while the Communist Party of China monitors their activity through their presence within each of these corporations. For NGO’s, recently issued regulations constrain their operations.

So the approach is if China cannot match or stem the Western cultural influence, China will contain and constrain it. One must wonder if it will work.

It is to be noted that as the Chinese culture is strong, there is no chance that Western culture will subjugate it. The Western cultural experience will remain a veneer on the Chinese culture. The Chinese will continue to live with the beliefs and the behaviour that have been at their core for centuries.

Pierre Brunet

Google; not in China

All large companies that target a broad spectrum of consumers and are active around the world need to be present in China. With a potential consumer base of 1.36 billion, this is an opportunity that no company can avoid. Not Google. Here is the story of what happened.

Created in 1998 by two students from Stanford University (California), Google is the leader in the search engine market with Google Search. It is the most widely used search engine in the US with a market share of 60%. Across the Western world, it has a similar market share.

In 2005, it established a fully owned subsidiary in China. In Jan. 2006, Google launched its China-based google.cn search engine, with results subject to censorship by the Chinese government.

google-china
Source: Google

By early 2009, its market share in China was 78%, with Baidu trailing at 18%. It was well positioned to capitalize on the Chinese market.

In March 2009 China blocked access to Google’s YouTube site due to footage showing violent images in Tibet. Access to other Google online services was also denied to users.

In January 2010 Google announced that, in response to a Chinese-originated hacking attack on them and other US technology companies, they were no longer willing to censor searches in China and would pull out of the country completely if necessary.

By April 2010, searching via all Google search sites in all languages was temporarily banned in mainland China, without affecting Google Map or Google Mail.

baiduBaidu is the Chinese market leader in search engine. Source: http://www.baidu.com

In November 2012, China had blocked access to Google. All Google domains, including Google search, Gmail, Google Maps, YouTube, etc., became inaccessible.

By 2014, in response to a series of terrorist attacks, China tightened its Internet censorship.

Google’s Gmail, Chrome, Map, YouTube and Google-based search inquiries have not been available to mainland China users since 2014. However, Google has maintained that it would continue with the research and development offices in China along with the sales offices for other Google products such as Android smartphone software.

youkuYouku online video service. Source: www.youku.com

By mid-2015, Baidu dominated the market of search engines with a share of 55%, followed by Haosou at 26% and Suogo at 10%. No western company had any meaningful market share in the search engine market in China. The same happened with online videos, where YouTube was replaced by iQiyi and Youku, which are key players in this market.

Pierre

Procter & Gamble messes up in China

Procter & Gamble (P&G) is known as a well-managed corporation. In marketing circles, it is recognized as an organization that manages it product portfolio in a most effective manner.

The darling of marketing business cases has dropped the ball in a major way in China. It has totally misread the market and the buying behaviour of consumers. It has made a series of mistakes that will take decades to correct.

From a start in the early 1990’s, P&G positioned itself well in China. It introduced products ahead of competitors and created a strong brand image. This served P&G well as China became the largest market by revenues outside the United States.

P&G has a strong presence in China with its Pampers disposable diapers, Ariel liquid detergents, Tide washing powder/liquid and various brands of toothpaste.

diapersA shopper inspects baby diapers at a supermarket in Fujian province. Source: SCMP Pictures

Unfortunately for P&G, it assumed that Chinese consumers would look for value-buying in purchasing disposable diapers. This approach was not validated by customers who elected to splurge on a little luxury for their children and chose higher quality diapers. As the P&G CEO stated last month “We’re stuck in the middle of the market. We went down, the consumer went up.” For P&G to make such a mistake is surprising. To address this situation, P&G introduced high-end diapers, which are imported from Japan.

The source of the challenge for P&G is that the market has moved towards premium products in spite of the economic expansion slowing down. That is a surprise for many western consumer goods companies that expected Chinese consumers to move down-market with the slowing economy. One more lesson for western companies that often assume that Chinese behaviour will mirror how westerners react.

The other challenge that P&G is facing in on-line shopping. Chinese shoppers have taken on-line shopping with a fury. It all started a few years ago when Alibaba created a site for consumers (www.taobao.com) that is similar to what it offers for businesses. Now, you only need to talk to people to realize the changes that have happened within the last 3 years. China has gone way past the Amazon.com business model. Their shopping habits have changed so drastically that multistory shopping malls had to transfer their top floors into restaurants, so high was the vacancies created by retailers that had to close.

on-line-shoppingOn-line shopping experience with http://www.360buy.com. Source: 360.com

Now you can purchase any product on-line at a cost that generally beats the price offered at retailers by 15 to 20%. P&G was late at recognizing this change, and only now has begun restructuring its distribution network to adjust to this new reality.

Again, many western companies were slow to understand the changing behaviour pattern of the Chinese buyer who is always pressed for time, and is surrounded with probably the most developed computer network in the world supporting advanced on-line services.

Pierre