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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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

Round 1: China 1 – USA 0

In a previous blog, I discussed the China-USA dynamic in the Trump era. After the first month of the Trump administration, it is most interesting to see what is happening on the world stage in regards to the dynamic between these two hegemons.

walmart-in-china        Source: China Daily

In its rapport with the USA, China has built on its cultural strength based on its long history, and has come on top of this game. Over 2,500 years ago, a Chinese sage put in writing the fine art of power. Sun Tzu wrote The Art of War, which is required reading at military academies around the world.

The Chinese have put in practice this long rehearsed skill. No wonder the Trump administration was bamboozled.

A recent article in BBC News details the strategy and accomplishments of China over the last few months. The totally amateurish Trump administration could not stem the “charm” and “power” of China.

Welcome to the new world order where cunningness trumps strength and brashness.

Pierre

BBC News Link: http://www.bbc.com/news/world-asia-china-39061702

Air pollution – How bad is it?

Western media often show pictures or discuss the air pollution challenges facing China. Almost everyone has seen pictures of people with face masks walking in a grey haze. Are these rare occurrences? Is it as bad as it seems? Let us have a look at what is happening.

tiananmen-square-in-beijingTiananmen Square in Beijing. Source: Source: Reuters

The key issue for air pollution in China mainly focuses on small particles in suspension in the air. Unlike the West, which faced the acid rain challenge in the 1970’s, China faces a different problem, though it can be difficult to appreciate the extent of the challenges as pollution is not openly discussed in the Chinese media.

Let us understand what the PM2.5 standard is. PM2.5 stands for Particulate Matter of 2.5 micrometers (0.0025mm) or less. The World Health Organization (WHO) has established a guideline and a guide for PM2.5. The guideline stipulates that PM2.5 should not exceed     10 μg/m3 (micrograms per cubic meter) annual mean (i.e. similar to average), or 25 μg/m3 24-hour mean for it to be acceptable. The WHO guide on PM2.5 is as follows.

who-air-quality-guide-for-pm2-5World Health Organization Air Quality Guide on PM2.5. Source: WHO

It is to be noticed that China has set the PM2.5 at a higher acceptable level than the WHO standard. The acceptable annual mean was increased from 10 μg/m3 to 35, and the 24-hour mean from 25 μg/m3 to 75. In effect, China has tripled the level set by the WHO, which makes it less demanding.

Let us now look at the actual PM2.5 pollution over the years. The data was obtained from the US Embassy in Beijing, which has a monitoring station on its roof. An analysis of the data has provided the following table.

beijing-air-quality-2008-2015 Source: US Embassy in Beijing (www.stateair.net/web/post/1/1.html).

For example, based on the above graph, roughly 180 days a year (i.e. 49% of 365 days) in Beijing would have a PM2.5 that would be Unhealthy (i.e. between 151 and 200).

If we use the mid-point value in each category of the WHO Air Quality Guide, we arrive at an annual average of 163 μg/m3, which is 4.7 higher than the Chinese acceptable standard and 16.3 times higher than the WHO acceptable standard.

The PM2.5 pollution is not distributed equally across China and affects particularly the eastern regions which are large consumers of coal, with an even greater pollution level in the provinces adjoining Beijing.

provincial-distribution-of-pm2-5-pollutionProvincial distribution of PM2.5 pollution, 2008-2010. Source: NASA

We can therefore conclude that the air pollution issue is of serious concern in China. But how do the Chinese people feel about this issue?

In a survey in spring 2015, the Pew Global Survey found that nationwide 76% of Chinese view air pollution as a moderate (41%) or very important (35%) problem. If this survey would have been done in the provinces that are most affected by air pollution, the percentage would have been understandably higher.

coal-consumption-of-coalNational wide, the consumption of coal generate by far the largest percentage of the PM2.5 pollution. Source: AFP

In China, air pollution contributes to an estimated 1.2 million premature deaths annually through an increase occurrence of lung cancer, cardiovascular disease and respiratory disease.

The state has realized that this issue has impacted a large segment of the Chinese population. It has started to take action, but for some, it is too little. To a limited extent, people have taken to the street to protest. The state has reacted forcefully to any public display of disapproval as seen in the city of Chengdu in Dec. 2016, where protesters were arrested and a planned protest was prevented.

sit-in-protest-in-chengdu        The sit-in protest over problems of smog in Chengdu lasted for 10 minutes before the demonstrators were taken away by police. Source: Twitter@paleylin

In an upcoming post, we will look at the actions taken by the government and what could be done to address the fundamental sources of the PM2.5 problem.

Pierre

Note: An excellent article (Jan. 18, 2016) from the Council on Foreign Relations presents the environmental challenges that China is facing (China’s Environmental Crisis). It can be found at: http://www.cfr.org/china/chinas-environmental-crisis/p12608

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

Trump on China

The improbable has happened. Donald Trump will be the next President of the United States of America. So, what are the possible implications for China? Let us look at what might happen from the most probable to the most challenging.

trump-in-china

A Chinese newspaper with the headline ‘Outsider strikes back’ above a picture of Donald Trump. Photo: AFP

The first topic regards the Trans-Pacific Partnership (TPP) free-trade agreement, which Trump has repeatedly stated that he would not sign because of his position that free-trade accords ship jobs outside the USA. The non-implementation of this accord goes against the desire of all countries in Asia to expand free-trade. The framework of the TPP was pro-market and was designed to set the stage for Western-based market economy rules. With this agreement not proceeding forward, the context for free-trade agreements in Asia moves in favour of China with its desire to see a strong presence of the state in the market.

Another approach favoured by Trump is to focus on America and take its distance from the rest of the world, as long as it is not about terrorists that can attack the USA. A Trump presidency would probably scale down the Pivot to Asia that the Obama presidency has taken. This implies that smaller countries in South East Asia will see their position weakened in regards to the territorial disputes in the South China Sea, where China has claimed vast areas within the “nine-dash” line. This will embolden China to continue and even expand its land reclamation efforts and force smaller nations to negotiate an agreement with China.

scs

The other aspect that was clear in the Trump campaign is the desire to see foreign countries that benefit from the military protection of the USA, carry a greater percentage of the cost of their defense. The benchmark of this cost is 2% of GDP, as clearly spelled out within NATO (North Atlantic Treaty Organization). In Asia, two key countries might be affected by this policy: South Korea and Japan. The most worrying is Japan, which is facing China in a contest of will in regards to projecting its influence across Asia and maintaining control of small islands that China asserts belongs to them. Currently Japan has been increasing its military buildup and freeing itself from parts of the constraints of their constitution imposed by the USA in 1945. At this moment, military spending by Japan is constrained to 1% of GDP, while for China it is almost 2% based on an economy 3 times larger. It is possible that the tension between China and Japan will continue to rise, allowing the Chinese government to continue its assertive policy towards Japan.

china-japan-island

The biggest question in regards to the dynamic between the USA and China relates to trade. Over the last 2 decades, millions of jobs have been lost in the USA and moved to China because of a much lower cost of operation (labour and material). This cost advantage might have been compounded by the weak value of the Chinese currency (RMB) relative to the US dollar, and possibly by market manipulation where State Owned Enterprises dominate (dumping of goods in sectors that are in overcapacity, particularly the steel sector). Not much can be done by the USA to influence the cost of labour or raw material in China, but substantial action can be taken by the USA on currency and dumping.

On currency, the key expression to watch for is “currency manipulator”, where China would be deemed to have weakened its currency relative to the USA currency in a manner that would reduce the costs of goods produced in China. If President Trump officially states that China has manipulated (i.e. weakened) its currency, a series of actions are automatically initiated. This could lead to substantial duties imposed on all or parts of Chinese imports into the USA, with possible counter duties imposed by China on US goods imported into China. Then a trade war between the two countries is a prospect.

What makes the situation even more challenging is that these events need to happen within the framework of the World Trade Organization (WTO), which would take years to rule on these actions. Would President Trump be willing to work through a third-party international body? Not sure, as he has stated many times that third-party bodies have impeded the development of the USA. This is where all bets are off, particularly if President Trump takes action on his frequent comments: “China is sucking us dry. They’re taking our money. They’re taking our jobs. They’re doing so much. We have rebuilt China with what they’ve taken out.”

The overarching point on the economic front that is confronting the USA is the fundamental realignment that I made in a previous posting (Time over for the West to dominate – Oct. 22). China wants, in fact needs, to continue growing economically at a rate that is 2 to 3 times higher than the US growth rate. So, relatively speaking the Americans will feel that they are not dominating the world anymore, and therefore that America is not great. Will the USA accept that China is overtaking them? That is the fundamental conundrum of this election.

gdp-realignment

The relative importance of the USA shrinks to the benefit of Asia. Source: The Economist

Unfortunately, history indicates that any switch of country that “dominates” has not happened peacefully. It is to be hoped that a modern society, where people understand the mistakes of our forefathers, will find a solution to this transition. I remain hopeful, but the upcoming Trump presidency will keep us on the edge of our seats for the upcoming 4 years.

Pierre

The size and complexity of China

Often in the West, when China is a topic of discussion, often individuals do not realize its size and complexity. People generally know that China is the most populous country in the world (1.37 billion). They know that the economy is large and growing. But few know the extent of the challenges that the political leadership is forced to deal with.

China is divided in 34 political entities: provinces (23), autonomous regions (5), autonomous cities (4) and special administrative regions (2).

political-structureSource: http://www.wikipedia.com

Of these 34 entities, a total of 18 provinces have a population greater than Canada (35.4 million). If the Guangdong province with a population of 107 million were an independent country, it would be the 13th largest nation in the world!

One might say that ethnically, China has a relatively uniform ethnic structure with 92% of the population being of Han origin. But one must consider that 55 ethnic minorities are recognized by the government, with their own rights (e.g. not subjected to the previous one-child family limit, combined with additional advantages).

Linguistically, the situation is even more challenging. One might state that Mandarin is the official language of the country and that the written language is the same across China. But the challenges come from the fact that the verbal language can vary substantially from region to region where people are totally unable to understand each other. If we go back to the Guangdong province, the common language is Cantonese spoken by 70 million people. These people would not understand much from a Mandarin speaker. China has 270 living languages (i.e. with a sufficient number of people to carry on being spoken). This challenge is illustrated by the subtitles shown in all Chinese movies so that people of other languages spoken in China can follow the story.

When it comes to religion, the situation is also diverse. Officially, China is a non-religious state, as advocated by communist precepts. In spite of this approach, religions have always and continue to play an important role in China. The main religions are Taoism, Confucianism, Buddhism (6%), Islam (2%) and various Christian denominations (2%). Approximately, 40% of the population practices a religion.

religion

Buddhist ceremony. Source: Unknown

Cultural differences are also felt across the country. One can easily hear comments from a Shanghainese about the “laissez-faire” attitude of the southerners in Hainan. In the north or the west, they will criticize Shanghainese for their aggressiveness. People from Beijing will be perceived as snobbish since they live in the nation’s capital. People in parts of the country will prefer to work for State Owned Enterprises that are much more predictable, while in other parts of the country, their entrepreneurial spirit will lead them to start their own business.

Finally, the economic disparities compound the above diversities. The first level of differences is between the rural areas and cities, where the cities are much richer than rural areas. This results in service (education, health, etc.) in rural areas being at a lower level than in cities. Secondly, between provinces, where the spread between the lowest and the highest is in a ratio of 4 times (GDP of $30,000 per person compared to $7,500). This will draw residents in poor provinces and rural areas into richer provinces or cities, in spite of the strong effort of the government to curtail this movement.

All these represent potential centrifugal forces that the central government needs to address on a continuous basis. How can it succeed, is an important question for the economic stability of the rest of the world.

Pierre