Choking on Growth? – Another Side of Stories

The New York Times ran a series of articles “Choking on Growth,” citing many severe environmental damages that accompanied China’s unparalleled growth.

One of the more startling problems is a shortage of water in northern China. Almost five-sixths of the wetlands in the North China Plain have dried up, and the area, where more than 200 million people reside, may be drained within 30 years.

The issues discussed in the article are true, but the tone is arrogant. Usually, there is another side of stories that is not told:

Five thousand years ago, one of the first emperors, Yu, fought to control the flood from Yellow River in the North China Plain. “????” (Honorable Yu Overhauls Water) is a story that can be cited by every child in China. Thousands of years later, Chinese are still fighting the same problem.

In 2002, China started a gigantic project called “????” (South-to-North Water Transfer Project). Chinese compare this project to the Hoover Dam in the United States, but on a much bigger scale. It’s a network of canals that brings water from flood zone of southern China to the North.

Another proposed solution is rapid urbanization, which is already under way. As radical as it may sound, scientists say “converting farmland into urban area would save enough water” because “wide spreading farming still uses more water than urban areas.”

As the article also points out, “Britain, the United States and Japan polluted their way to prosperity and worried about environmental damage only after their economies matured and their urban middle classes demanded blue skies and safe drinking waters.”

Indeed, Chinese look at Americans as their role models. They want to own homes, drive SUVs, and travel around the world. “Typically, industrial countries deal with green problems when they are rich,” said Ren Yong, a climate expert in Beijing. “We have to deal with them while we are still poor. There is no model for us to follow.” – With this attitude, there is hope for resolution.

Beijing Snapshots

Beijing is notorious for its severe air pollution. This photo was taken in August from my hotel at the Second Ring and Jianguomen Ave. Unfortunately, it looks like this every day!

Beijing has over 3 million cars. Among them, more than 2 million are privately-owned passenger cars. Divided by household number (based on hukou), it means every household in Beijing has a car. In preparing for the 2008 Olympics, Beijing exercised an “only-half-of-cars-running” policy as an experiment. From Aug. 17th to 20th, only odd- or even-numbered cars, based on license plate number, can drive on streets. That means the traffic was reduced by at least one million cars during those four days. But I didn’t see much improvement in the air quality.

There is a “hidden paradise” in the outskirts of Beijing called “The Orchard,” located just outside of the Fifth Ring near Airport Road.

Essentially, it’s a restaurant in the midst of an orchard farm, offering the best Italian food you can ever find. Its Chinese-meets-Tuscany styled interior gives a sense of exoticness. Although far away from the city, the water in the pond still looks pretty mucky. This secret garden is developed by a couple (the wife is an American). In addition to the restaurant, the couple makes furniture and clothes. The taxi driver told me they are making hundreds of millions every year!

A Wake-up Call: China Passing Us By

An article by Knowledge @ Wharton cited David G. Marshall, a real estate guru and CEO of Amerimar Realty, about his experience of visiting China recently:

“In the last 10 years, not the last 22 years, Shanghai has built 2,000 high-rise buildings between 20 and 108 stories high — one more spectacular than the next. We stayed on the fifty-ninth floor of the JW Marriott, which was the headquarters for our Wharton Fellows Conference. You can look in four directions as far as the eye can see and you see nothing but spectacular high-rises. At night it looks like Las Vegas: All the buildings are lit up, they look like rocket ships going off. It looks like the Fourth of July. It is absolutely incredible what they have accomplished.

And we, on the other hand, are arguing over Sarbanes-Oxley, stem cell research, an archaic tax code, social security and health care — and I could go on and on. They’re all very important issues, but we are paralyzed by these issues and we are not growing. It is reminiscent to me of what probably took place with Great Britain not watching the United States — when the United States went flying by Great Britain. [China is] going to go flying by us and we’re going to wake up one day and say, “Oh my God, look what we missed.” That was my take away from China.”

I think Mr. Marshall’s observation and his sense of urgency are very valid. China is growing at a breathtaking speed. Things change in a matter of days. Yet people here are still rumbling about “human rights,” “Internet censorship,” “intellectual property,” when it comes to China. It’s not that these issues are not important, they are just so out of sync with the reality of China these days; or at minimum, they account for a small percentage of what’s going on there. As Mr. Marshall said: “Their goals are to get one billion, 300-500 million people educated, clothed, housed and fed. Intellectual property rights are not on their radar screen and [won’t] be.”

I also think Mr. Marshall’s comments are brilliant: “We’re trying to play a basketball game with a basketball, and they’re trying to play a basketball game with a football. It’s a different set of rules. We better realize that it’s a different set of rules and that they’re not going to play by our set of rules.”

It is a wake-up call for Americans, as Marshall further pointed out: “I think that it’s very naïve for us to have our congressmen arguing about how we’re going to punish China for not letting the Yuan float; and how we’re going to punish China for intellectual property rights. When [China is] sitting there with $1.3 trillion of our Treasury bonds, you’re not going to punish anybody.” Perhaps America has been in dominance in the world for too long. I hope Americans won’t learn the British lessons the hard way.

One Car Policy?

Anyone who has visited China recently would complain about traffic in Beijing, Shanghai and other major cities – it’s unbearable, so is pollution. A growing middle class increasingly owns cars. The number of car owners in China is rising by 10 million a year. Last year, China overtook Japan to become the world’s second-largest auto market.

China’s rapidly increasing demand for energy causes tremendous environmental concerns such as severe pollution and global warming. According to the International Energy Agency, China’s greenhouse gas emissions, although far lower than America’s when measured per person, are growing fast and are predicted to surpass America’s this year.

It sounds worrisome. But there are signs of hope. A recent The Economist article says China has tougher standards for fuel efficiency than America. “Its cars use 6.9 liters to travel 100 km compared with 9.8 liters in America. By next year the Chinese standard will rise to 6.5 liters – a level America will take a decade to reach under the most ambitious plans.” China is “the world’s fifth-biggest user of wind turbines, and the biggest consumer of the sort of solar panels used to heat water.”

The article went on saying that China’s success at curbing the growth in its populations – the so-called “one child policy” which is much criticized by the West – and reforestation also helped to reduce the emissions of carbon dioxide each year. Between 1990 to 2005, China’s energy intensity (the ratio of energy-consumption to economic output) fell by over 4 % a year.

Perhaps China will come up with a “one car policy,” which I am certain won’t be criticized by the West this time. But once country opened up and Chinese could see how people lived on the other side of the world, there is no turning back. Would it be fair to say that Chinese citizens are less entitled to live as lavish as American do?

The Property-owning Middle Class

Home is a very important concept for Chinese people. A growing Chinese middle class can increasingly own their own homes. According to some estimates, China‘s rates of home ownership are as high as 80% in the cities, – topping US homeownership rates of about 69%.

Before the reform, all property in China was nationalized and “collectively owned by the people.” Housing was distributed along with work. During the Cultural Revolution, property owners were persecuted. But now, owning a house in China is a badge of pride. As a new home owner said, “Owning my own home will give me a sense of belonging.”

In the past two and half years, prices for housing have soared 40% in Beijing and 30% in Shanghai. A growing middle class with its wealth tied up in houses wants to pass these assets on to their only children. In March 2007, China’s lawmaking body, the National People’s Congress, passed a new law on property rights, which is mainly intended to reassure the country’s fast growing middle class that their assets are secure.

Private ownership of homes has profound implications for China’s political and economic systems. As Internet entrepreneur Ding, who is trying to create a for the Chinese middle class, said, “Chinese people used to be tied to their homes chosen by their work units. Now they are able to choose their communities, their neighborhoods. It’s a fundamental change in their lives.”

Ultimately, the Chinese middle class may fundamentally change China in ways we cannot foresee. It would be interesting to see how a property-owning middle class will influence government policies, how home owners will protect their rights, and to what degree it will lead to a more pluralistic society.

“Cautious Consumers” or “Expanding Middle Class”?

Not too long ago, BusinessWeek ran a story “Cautious Consumers” citing a family in Beijing with combined take-home income less than $800 a month that “hardly ever go to restaurants, a movie outing is a rare treat, and they have no plans to trade in their bicycles for a motorcycle or car.” The article says most mainlanders “sock away tons of cash, close to 40% of their earnings every month” and only buy a product when it is heavily discounted.

This may be true for the older generation, since frugality is a tradition so deeply rooted in the Chinese culture. But if you look at the younger generation, their attitude may be very different. During the week-long holidays in May, sales of air conditioners, LCD TVs, clothing and jewelry escalated, as much as a 41% increase from last year.

According to official figures, retail sales in China grew at an annual rate of 15.5% in April, “beating forecasts and marking the fastest pace since 2006.” The expanding Chinese middle class is the major engine behind the growth in sales. Government initiatives to encourage spending by lowering taxes, especially in rural areas, have also fueled sales.

“The figures reflect a wider move by China to shift the focus of its economic growth – which has been taking place at breakneck speed – away from exports and towards domestic spending instead.” says BBC News.

Yet there is a debate on China’s illusory middle class market. No wonder China is difficult for foreigners to understand. It is a country full of contradictions and extremes.

China Moving Away from Export-led Growth

The Nobel laureate in economics Joseph Stiglitz, who was a professor at Stanford during my Stanford years, says in his new article “World has much to learn from China’s new economic model” that China is employing a “new economic model” to move away from export-led growth, which other East Asian countries have pursued. China recognizes that things worked in other countries may not be suitable to China’s unique situation.

To move away from export-let growth, China needs to stimulate domestic consumption. “While the rest of the world struggles to raise savings, China, with a savings rate in excess of 40 percent, struggles to get its people to consume more.” The good news is, as professor Stiglitz notes, “There is a consciousness of environmental limits and the realization that the resource-intensive consumption patterns now accepted in the United States would be a disaster for China – and for the world.”

The new model also requires China to create an independent innovation system. “Western technological innovation has focused too little on reducing the adverse environmental impact of growth, and too much on saving labor – something that China has in abundance.” says professor Stiglitz. So, it makes sense for China to focus on technologies that use fewer resources, but can be used by the majority of people.

In the end, Stiglitz summarizes: “Too many people think of economics as a zero-sum game, and that China’s success is coming at the expense of the rest of the world. …. But economics is really a positive-sum game. An increasingly prosperous China has not only expanded imports from other countries, but is also providing goods that have kept prices lower in the West, despite sharply higher oil prices in recent year.”

To hear a Nobel laureate say this is really encouraging: “We should all hope that China’s new economic model succeeds. If it does, all of us will have much to gain.”

The Chinese Renaissance

Last year, China consumed 15% of the world’s energy, but only produced 5% of global gross domestic product. While a lot of people in the West are worried about China’s insatiable hunger for energy and growing economic power, the vast majority of Chinese see their rise as nothing but a return to historical norms.

A recent The Economist article says that “between 1600 and the early 19th century, China accounted for between a quarter and a third of global output. At the time China’s agriculture was more advanced than the West’s, its cities bigger and more literate and its ruling classes more meritocratic.” No wonder Chinese simply call what’s happening now a “renaissance.”

There are also concerns about China’s trade surplus and undervalued currency. The article says: “In several respects that view is wrong. With a trade-to-GDP ratio of around 70% and a sea of foreign investment, China is one of the world’s most open economies. Much of the growth in America’s bilateral deficit with China reflects a shift in low-cost manufacturing from other parts of Asia to the Chinese mainland.”

Then the article went on to say: “America’s emphasis on exports misses the point about China’s economic power. That power comes not so much from being a seller of things but increasingly from being a buyer, an investor and a provider of aid, in Asia and beyond. One Chinese diplomat put it thus: ‘Imports: that’s real diplomacy, because it means you’re attractive to others. It means other countries need you, not that you need them.’ This subtle understanding sets China in stark contrast to how Japan viewed the world during its post-war rise.”

I think this is brilliant! Like a person, when a country starts to give rather than take, it will become really powerful. That’s a new kind of power, and I would like to call it “The Chinese Renaissance.”

Mobile Marketing to Reach Chinese Consumers

An interesting article by Time (Mar. 29th, 2007) says By 2010, 70 million Asians are expected to be watching videos and TV programs on handsets. Advertisers are looking for new ways to reach audiences. According to eMarketer, corporate spending on handset advertising is expected to soar to $13.9 billion by 2011.

In China, an merging middle class with a real purchasing power is the target of mobile advertisements. When BMW launched new models last year, it tried mobile-video ads, downloadable screen wall paper and ringtones. “The click-through rates were unbelievable,” says the BMW marketing manager. Other multinationals that are pioneering in mobile phone marketing are McDonald’s, Proctor & Gamble, etc.

Chinese consumers seem to be receptive to mobile marketing. According to a Shanghai-based mobile marketing firm, 9 out of 10 people open and read unsolicited text messages: “When Johnson & Johnson recently introduced a new contact-lens line in China, it sent an “m-coupon,” good for free samples, to tens of thousands of young, urban women via text messages. Nearly 10% of recipients redeemed their coupons by showing the message to store clerks. That’s a far higher response rate than the average 0.2% rate for e-mail ads.”