Expect plenty more growth for China

Here comes the hot money! As the U.S. economy totters, China will look even more attractive to investors. And their cash flows, looking for high returns, will keep growth revved.

At least that’s how Andy Xie, Morgan Stanley’s former star economist in the region, sees the outlook for the coming year. Xie spoke to the Foreign Correspondents’ Club of China this morning in one of the most stimulating talks we’ve had this year.

First off, Xie is not your average bank wonk. He’s an MIT-trained engineer/economist with a sharp tongue, sharp enough that it cost him his job at Morgan Stanley last year when he suggested Singapore was a haven for corruption and money laundering.

Xie’s interesting shtick is that China is far less reliant on trade with the U.S. than in the past. It is selling heavily to places like Africa, India and Russia, which now have cash to buy. South-South trade, as it were, is becoming a reality. And this will keep China’s economy churning. Here are some excerpts:

“Everybody in the world has too much money except the United States. Think about it. Even Russia has a $500 billion in foreign reserves. Even India has over, like, $200 billion in foreign reserves. India never had that kind of money before. This has very important implications for what happens next year. Emerging economies do not need to cut back. They can expand. You go to Dubai, and it’s a bubble. Yes, it is a bubble. But they have money, it’s their own money. They are not borrowing money... 

“Even Africa has a lot of money. So emerging market trade in China is already half of China’s trade growth. As American consumers need to rest, need to pass, suddenly emerging market trade is happening. And emerging market trade is right up China’s alley because emerging markets export commodities, exactly what China needs - oil, copper, iron ore – exactly what China needs. And China exports cheaper consumer products and on top of that cheap capital goods, like pumps, like trucks...”

"This is truly the dawn of emerging market trade development.”

Xie said the slowdown – and possible outright recession – in the United States will also help China in the next year or two.

“The hot money is going to come to China. Six months ago, I wrote an article that said as the U.S. comes down, a lot of people will come to China. The reason why is because I see the financial guys are running the world, so-called financial capitalists. … These people need to do something. When one bubble bursts, they go somewhere else. You can be sure of that. . . . Next year, the hot money story is going to become bigger. …

“Yes, we see a lot of problems in China. But the trade is still intact. The bubble can continue with all this hot money coming in. So the strong economy is likely to last.”

Of diamonds and mistresses

I found two interesting stories today buried deep in the pages of the Shanghai Daily, a newspaper I’m reading due to business travel near China’s financial hub.

The first story is on diamond sales. China’s “diamond jewelry demand topped $2 billion last year,” it said, alluding I imagine to total diamond sales.

In a nation where ostentatious displays of jewelry were not common even a few years ago, this marks quite an explosion. Shanghai’s Diamond Exchange was set up in 2000 and has grown from 41 members to 209 members, the article notes.

The market is growing so quickly that diamond merchants from around the world have decided to hold the World Diamond Congress in Shanghai in May 2008.

In a separate, presumably unrelated, item, a law professor in Beijing is proposing a new category of crime – sexual bribery. This is supposed to combat the prevalent practice among corrupt officials of taking mistresses.

The article says Fang believes that 95 percent of officials exposed as corrupt have taken mistresses, and that obtaining sex for influence may be common. But the criminal code does not penalize this kind of sexual coercion as a crime.

“Fang Peng of the China University of Political Science and Law in Beijing argues that party and other moral disciplines are not enough to deter corrupt officials from keeping a mistress,” the article says, so the anti-bribery law should be broadened.

Of course, the problem arises of how to prove an official was seeking sex for influence.

That problem isn’t unique to China.

Ruffled feathers over the Kitty Hawk

The incident last week in which China initially denied a port call to the USS Kitty Hawk aircraft carrier and its escort group, and a separate incident in which two minesweepers were barred from seeking refuge from bad weather in Hong Kong, continue to roil Sino-U.S. relations.

On Tuesday, Adm. Timothy Keating, the top officer of the U.S. Pacific Command in Hawaii, gave a news conference. The Chinese Foreign Ministry also had something to say.

The transcript of what Keating said is available here (blocked within China). Here are two excerpts, beginning with Keating’s response to a question about the Kitty Hawk:

            ADM. KEATING: Thanks, Lita. I hope it's not an ongoing problem, and it shouldn't be an ongoing problem. This is a kind of a mundane, run of the mill -- I've been to Hong Kong, I don't know, I'll say six times in my career.  I've been at it a long time, but I've been to Hong Kong a number of times. It's one of the great liberty ports in the world. It's a terrific opportunity for sailors, Marines -- if there are some on board and to spend time with their families.   

            You all are aware the Kitty Hawk was close to making her port call. Families had flown down from Japan, hundreds of them, I'm told, and at the last minute the Chinese denied the Kitty Hawk battle group -- the carrier and several of its escorts -- denied them permission to come into Hong Kong.   

            This is perplexing. It's not helpful. It is not, in our view, conduct that is indicative of a country who understands its obligations of a responsible nation. There is little strategic benefits to it. There's a lot more downside than upside. So it's hard to characterize it in anything but a at least perplexing, if not troublesome, light.   

            I have had no conversation with any Chinese officials. We are in dialogue with OSD (Office of the Secretary of Defense) and State, and I've got a phone call in to our ambassador there. I've not yet been able to connect to Amb. Randt.   

            So, perplexing, troublesome. No direct contact with the Chinese. Would certainly hope that this is not indicative of future repeated denials. We'd like to get into Hong Kong. We want to engage in even discourse. I'm hoping to go to China in January. As you know, Secretary Gates was just there a couple of weeks ago. He had a good visit. So this denial in the very late stages of port visit planning is -- came as a surprise and it's of some concern to us.

            Question: To follow up, have there been attempts to contact the Chinese that they have rebuffed, or have they just been not successful, or no real overt effort yet? Can you sort of describe what types of efforts are being made and if the Chinese are simply refusing to explain?

            ADM. KEATING: I could not characterize it that way, Lilly. I have -- I personally as commander of Pacific Command have not initiated any phone call to Chinese military counterparts, and wouldn't, necessarily. It is more a State Department function, which is why I say I'm working to talk to Ambassador Randt. And I would leave that -- the high-level -- I'm not suggesting we would demarche, but activities such as that are much more in the State Department and Pentagon's line than they are ours here at Pacific Command. I've not spoken to our ambassador. I've got -- we're playing phone tag right now.   

            I don't think that there is anything calamitous about this or there would have been more direct back-and-forth action between officials from our government and their government. And as you know, the Chinese reversed themselves after the Kitty Hawk reversed itself, its battle group. The Chinese said: Oh, yeah, you know, the sun was in our eyes or something; you can come in. Well, it was too late by then.   

Later, Keating was asked about the two minesweepers seeking protection from an advancing storm in the Pacific. Here’s his response:

       ADM. KEATING: It's very unusual, one, to kind of get caught, but that's the way weather at sea can be. I've found myself -- on aircraft carriers, anyway -- in water, wind, sea conditions that even on a big aircraft carrier will get your attention.   

            Those two minesweepers were engaged in an operation, not against China but out in international water, and a storm blew up and they needed to get into a place of refuge. And, you know, Hong Kong's nearby and that's a great place to go. So for the Chinese to have denied those two ships, in particular, small though they may be, that is a different kettle of fish for us and is, in ways, more disturbing, more perplexing than the denial for the Kitty Hawk's port visit request.

            As it turns out, both the Patriot and Guardian remained unaffected. They suffered no damage. But this is a kind of an unwritten law among seamen that if someone is in need, regardless of genus, phylum or species, you let them come in; you give them safe harbor. Jimmy Buffett has songs about it, for crying out loud.   

            So this is an area that causes us a little more concern. And I think Gary Roughead had a couple words for you earlier. That is behavior that we do not consider consonant with a nation who advocates a peaceful rise and harmonious relations.

            So it causes us -- it gives us concern.

I can’t find a copy of Foreign Ministry spokesman Liu Jianchao’s statement on the incident. But I see Bloomberg quoted from it earlier today. Here’s what Bloomberg said:

Foreign Ministry spokesman Liu Jianchao said in a statement today that all dockings by U.S. naval ships in Hong Kong must be “applied for in advance” and in accordance with the territory's laws. “In this case, the applications were not made in advance and in a timely fashion.”

Xinhua makes no mention of the back-and-forth but gives great coverage to the arrival of the Chinese missile destroyer Shenzhen in Tokyo for a four-day visit, casting it as a sign of "new vigor" in relations between Beijing and Tokyo. The story also fails to mention that Japan is the closest U.S. ally in Asia, and that many ships of the forward-deployed U.S. Seventh Fleet are based there.

The four 'new pests'

During the era of Mao Zedong, Communist cadres would periodically launch campaigns against the “four pests” – referring to rats, flies, mosquitoes and sparrows.

With the Beijing Summer Olympics coming up in August, the state media occasionally refers to the four “new pests.” Click here for one article that does so. This time the pests refer to spitting, cutting in line, swearing and smoking.

"Promoting civilized behavior among Chinese travelers and residents is a long-term task. For the Games, we need to focus our resources on the main problems," says Zhang Huiguang, head of the Capital Ethics Development Office, referring to the four “new pests.”

I wonder how Ms. Zhang, who is Beijing’s official etiquette maven, feels she is doing in her campaign?

Like the campaigns against the pests of yore, the new one involves massive numbers of people. Beijing has issued 2.8 million pamphlets about daily etiquette to local households and offered polishing courses to all civil servants and 870,000 people working in the service sector, such as taxi drivers, waiters and bus conductors.

The USS Kitty Hawk affair

China’s mysterious initial refusal to let the USS Kitty Hawk and its five escort ships dock in Hong Kong for a four-day Thanksgiving layover is still the source of speculation.

China hasn’t explained why it denied the docking rights as the ships sailed toward Hong Kong , nor has it said why it reversed course once the ships had already veered toward their homeport in Japan. The sailors had to eat Thanksgiving dinner aboard their vessels. Read news stories here and here.

Both sides are left a bit raw over the incident.

Here are the two plausible explanations I’m hearing.

1) China is still angry over the October reception given to the Dalai Lama in Washington, in which President Bush received the Tibetan spiritual leader in the White House and Congress granted him its highest award.

2) The port call coincided with a large-scale naval and air operation by the People’s Liberation Army along coastal China, and would have put the U.S. ships in easy monitoring distance of the exercises.

The Chinese military exercise has put a crimp on commercial aviation along much of eastern China’s seaboard, backing flights up. It is not unprecedented that military exercises would disrupt commercial aviation. Back on Dec. 1, 2006, the Shanghai Pudong International Airport was simply shut down for two hours with no explanation, forcing international flights to turn back or land elsewhere.

The incident is certainly a step backward after the announcement earlier this month that Beijing and Washington agreed to set up a telephone hotline between the two defense establishments to prevent any misunderstandings from flaring up.

Of course, there is a third possible explanation, and that is that some unknown incident by Washington was seen as provocative by Beijing, and this is the response. We may never know if that is the case.

Hovering over air in Beijing

Living in China is like being in a laboratory and observing an experiment unfold.

The speed of change in the physical surroundings, especially in cities like Beijing, has no parallel anywhere in the world, as far as I can tell. A modern gold rush is afoot here, and prospectors are arriving from around the globe. Some of them are charlatans, and there’s mud everywhere, but what is emerging can be a thing of beauty.

There is an international feel to the change. The Chinese have money, and they are throwing it in a lot of directions. Some of it is landing in the laps of the world’s most daring and famous architects. And they are audacious in their designs.

Sometimes it is downright dramatic.

Take, for example, the new CCTV tower(s), which I have written about before. Workers toiling for months now have built two leaning towers that thrust into the air at drunken angles. At any moment now, and trust me, I look every day, the workers will link the two towers with a multistory elbow 40 floors above ground.

The end result will be a crooked Z-shaped building, a loopy angular twin-tower structure with a cantilevered cross-section that hovers over absolutely nothing, thin air. The ground will be 525 feet below. I dare say those afraid of heights may not want to walk the glass-bottomed cross-section once it is complete.

The joining of the two towers has to happen quickly, I’m told, because pressures of wind, temperature and minor earth movements could torque and damage the buildings. So it’ll happen before dawn, maybe this weekend.

Rory McGowan, a social friend of ours, is one of the chief engineers on the project for Arup, the huge British firm. A while back, I heard him say that perhaps no construction project on Earth has had the kind of computer modeling done to it as the CCTV tower. As perilous and tipsy as the structure may appear, it has survived every possible stress put on it and comes out firm.

Barely a decade ago, computers were not really powerful enough to test such designs for stability and stress-resistance.

The new tower, designed by the firm of the Dutch architect Rem Koolhaas, will house the headquarters of China’s state broadcaster, and should be in use by the 2008 Summer Olympic Games. I have no doubt that visitors will see it and remark how they’ve never seen anything like it before. Some already dub the structure the “twisted doughnut.” Read more articles here and here.

The finished building will be that largest single structure in the world after the Pentagon in Washington.

The changing Chinese wardrobe

Many of us from the West tend to have different kinds of wardrobes. We have work clothes. We have weekend clothes. We probably have party clothes. And in my case, I have a pretty wicked assortment of Halloween costumes, although nothing to match the closet of Paris Hilton, who seems to be shopping in Shanghai this week.

Generally speaking, Chinese do not go in for this stuff. Chinese tend to wear the same clothing to work, at home and around town.

And there’s proof.

The latest McKinsey Quarterly (behind a subscription wall) just dropped across my e-desk, and it includes an interesting report on China’s $84 billion retail apparel industry, the world’s third largest, trailing only the United States ($232 billion) and Japan ($100 billion). The report compares clothes shopping in China, India and Brazil.

In marketing lingo, we in the West have “differentiated” wardrobes. Most Chinese do not.

“Forty percent of the Chinese respondents, for example, report wearing similar clothing at work, formal social occasions (such as weddings), and dates with friends or family, compared with only 8, 13, and 11 percent of consumers in Brazil, India, and Russia, respectively. Although habits are changing, apparel retailers in China may find it more challenging than they do in other emerging markets to establish themselves as specialists in clothing subcategories, such as ladies’ office clothing or specialty outdoor casual clothing.”

Most Chinese don’t place a premium on foreign brands, rarely trying them on. That differs sharply from a place like India, where half of consumers think foreign brands are superior in value or quality.

Chinese also place a premium on price of apparel. Curiously, though, Chinese consumers don’t trust their instincts on how much clothing should be worth: “Whereas nearly half of the respondents in Brazil, India, and Russia believe that they can quickly assess the quality of a garment without taking its cost into account, only 22 percent of Chinese consumers say the same,” McKinsey says.

There is an interesting caveat on the findings: Young urban Chinese, aged 18 to 24, are a complete exception.

“Many young consumers favor international brands. Half agree that “foreign brands are higher quality than local brands,” compared with an average of 15 percent across all other age cohorts. Similarly, 36 percent of China’s young adults say they often try on foreign products and brands, compared with an average of only 13 percent of other respondents.”

McKinsey said young consumers are different from older ones in most countries, but in China the differences are more pronounced.

All of this is a challenge for global clothing retailers entering China. They face powerful local competitors vying on price, and a clientele not accustomed to subcategories of clothing. But the payoff could be huge. McKinsey suggests giving Chinese fashion at a discount.

“An alternative approach, which multinationals such as Zara are starting to use, involves identifying consumers willing to pay more for the latest fashions. By creating low-cost yet trendy stand-alone outlets in upscale malls or shopping districts (as opposed to department stores), retailers can appeal simultaneously to mass-market consumers with premium tastes and to higher-end customers prowling for bargains. Such strategies hold great promise as China’s mass market grows larger and richer.”

Shaky ground at Three Gorges

There’s been another landslide near the reservoir of the Three Gorges dam, the latest of many to jolt the mammoth project.

State media says one person was killed and two are missing after earth tumbled down at the entrance of a railway tunnel near Badong.

Like many foreign journalists, I wrote a recent story that suggested the Three Gorges dam may go down in history less as a magnificent feat of engineering than as a folly against the environment. Click here for a Reuters story published in the Sydney Morning Herald, here for The Economist story, here for the New York Times story, and here for the Washington Post story.

Pressure from the rising water has loosened the steep mountainsides along the reservoir, and remaining villagers live in fear that they may slide down the ravine.

Some 1.3 million Chinese have already been relocated, and several million more may find that their homes near the reservoir still aren’t safe.

Update: Xinhua now says the landslide at Badong actually buried a bus, leaving some 30 people missing and presumed dead. The bus company reported the vehicle missing, and it was found in the rubble early Friday, Nov. 23. Click here for a dramatic photo and the story.

A testosterone rampage in China?

China’s “gender gap” is turning into one of those stock phrases to insinuate that the social situation in the countryside is volatile. You might want to take that belief with a grain of salt, though.

The issue has popped up again in recent days. The state news agency Xinhua reported last week that there are 119 boys born for every 100 girls, adding that in the countryside the ratio rises to 122 boys for every 100 girls.

The story cites Zhang Weiqing, director of the National Population and Family Planning Commission, as saying that many parents are still illegally using ultrasound checks to ensure that their offspring will be a boy.

China now has 18 million more men of marriage age than women, and this abundance of testosterone-laden single males is expected to hit 30 million by the 2020.

The single males are commonly known as “bare branches” because they are unlikely to bear fruit, leaving their family lineage barren.

So will those unencumbered males end up being rowdy frat boys? Or will they be more like monks in a monastery?

Some researchers say the mass of restless male energy is a ticking time bomb, threatening China’s domestic stability and even international security. They say excess men would increase chances of social aggression, authoritarian rule and even war. Women will become a commodity. Prostitution could surge.

This thesis emerged with the 2005 book Bare Branches: The Security Implications of Asia’s Surplus Male Population by Valerie M. Hudson and Andrea M. den Boer.

Now comes news that a Columbia University researcher, Lena Edlund, says gender imbalance in China leads to greater crime. According to this news report, she says that every one percent increase in gender imbalance leads to a six percent increase in violent and property crime. She studied the period from 1988 to 2004.

I haven’t read her report, and am relying just on the news report, but on the face of it I don’t buy it. The period she studied saw an explosion of private property in China. Of all the variables, how could she determine that a rise in crime is attributable to excess males?

There are many possible outcomes from a gender gap other than social instability. Check out this fellow China blogger’s essay to read a long examination of the matter. He notes that China has likely had an excess male population a lot longer than many theorists suggest. Yet the serious problems haven’t yet manifested. 

So maybe preparations for the hormonal rampage in China are premature.

Dissent with a dose of nationalism

The word “dissident” often strikes me as being vague in China.

I thought about it when news came in recently that Chinese activist Guo Feixiong had been convicted and sentenced to five years in jail.

First off, Guo Feixiong isn’t his real name. I didn’t even know that the first time I interviewed him back in mid-2005 in Guangzhou, where he was helping organize an uprising in the village of Taishi, where residents complained of corrupt leaders. His real name is Yang Maodong.

Second, he’s not a lawyer. Plenty of news articles describe him as a legal activist. In fact, he’s a creative writer who trained himself in the law. More accurately, he might be described as a self-trained “barefoot” lawyer.

Then there’s the bit about him being a “dissident.” Iconoclast? Yes. Social organizer? Yes. But Guo is also a nationalist, and therein hangs a little story.

Guo got arrested a few weeks or months after I first met him. Later, he passed word to my office about his experiences in detention. He said he had been ordered to do prison labor. He refused, and actually issued a legal protest about the matter.

I was intrigued. So I flew back down to Guangzhou to have dinner with Guo and discuss the prison labor issue. Now, everyone knows that prison labor is fairly common in China. I have a friend who does business in Latin America. On a buying trip to Shandong province, he arrived to visit a factory. But once there, a manager said he couldn’t tour inside. It was actually a prison.

In Guangzhou, Guo and I chatted, along with my assistant, and he offered some details about his life in detention. But then I spelled out to Guo that I wanted to investigate prison labor, what products are made in prisons, and who benefits from the huge cost advantages of such low-cost labor, Guo basically went mum.

To paraphrase, he said such a story would be harmful to China’s image and he would not collaborate. I was surprised. Stunned really. I thought that a fellow of his sensitivities would be interested in shedding light on the prison labor practice. But he was adamant in saying he thought such a story would end up hurting legitimate industries, and would do more harm than good. Thus, Guo’s patriotic and nationalist stripes emerged. It was an eye-opener.

Other than what Human Rights in China reports, I don’t know many details of Guo’s conviction following his September 2006 arrest. HRIC says Guo was convicted in Guangzhou Nov. 14 of “illegal business activity” and sentenced to 5 years’ imprisonment and fined 40,000 yuan (some $5,350).

Here are three paragraphs taken from their statement.

“The imposition of this heavy sentence for what appears to be a politically motivated prosecution has a chilling effect on other rights defenders and undermines China’s efforts to build a rule of law,” said HRIC Executive Director Sharon Hom. “This result following a procedurally flawed process, a year in detention, and reports of torture, is particularly ironic in the case of Guo Feixiong, who advocated the use of law to seek justice.”

Guo went on trial at Guangzhou’s Tianhe District Court on July 9, 2007, on charges of “illegal business activity” in connection with the publication of Shenyang Political Earthquake, a book concerning a political scandal in Shenyang City, Liaoning Province.

Guo was detained and beaten on a number of occasions in 2005 and 2006 before he was formally arrested. Since being taken into formal detention, he has told his lawyer that he has been subjected to severe physical abuse and round-the-clock interrogation, and he has reportedly gone on hunger strike for a total of 40 days in protest against his treatment.