A Golden Age of Sino-UK relations?

Via Ni Hao
Via Ni Hao magazine

International summits are funny beasts. Can you remember the last important policy that came from one? Me neither. And yet they are important in giving leaders space to talk, to build relationships and to demonstrate good will. Face time is always important in what is, after all, a field dependent on personality. Host nations also have a chance to show their ability to manage the show, as they strive to bring together resolutions that will serve as their legacy. The world is a much smaller place and carve-ups on the scale of the Concert of Vienna are no long possible, but with proximity everything is much more tightly linked, so problems can be sorted out (or pile up) so much more quickly.

The Hangzhou G20, then, is China’s chance to shine, another opportunity to claim the world’s attention. And while the present summit might lack the urgency of the 2009 G20 in London (just six months after the collapse of Lehman Brothers), President Xi Jinping is clearly aiming to use the hosting of the summit to reinvigorate world trade (and thereby, of course, China’s own economy). This in fact suits most of the participants, who also find their economies sluggish (France, Italy, Japan) or downright bad (Brazil, Russia, Argentina). But the UK presents a particular, special case: following Brexit, all seems to be up in the air, though one avowed goal of Brexiteers is increasing trade with the fast growing Asian nations. So Theresa May and Xi Jinping have much to discuss.

Although the British government under David Cameron and George Osborne declared a new golden age for Sino-British relations, the signs for May’s administration have not been so promising. One of the first decisions she took was to review the Hinkley Point nuclear power station, which was to be jointly funded by French and Chinese investment. However, subsequent statements by both May and Chancellor Philip Hammond have stressed Britain’s commitment to free trade. The idea seemed to be that, without the European Union’s inward-looking tariffs and regulations, the UK would be free once again to trade with the world, a global entrepôt like a larger Singapore.

So while May might be wary of welcoming foreign funding of strategically important infrastructure, a commitment to increased free trade would please Xi Jinping. The Chinese President’s opening remarks stressed economic reform, calling for four measures (as cited by the People’s Daily:

  • Build an innovative world economy to generate new drivers of growth
  • Build an open world economy to expand the scope of development
  • Build an interconnected world economy to forge interactive synergy
  • Build an inclusive world economy to strengthen the foundation for win-win outcomes

G20 summits, with their need to accommodate very different economies, can tend to lead to nebulous pronouncements rather than drives for concerted action. Yet as the first major summit hosted by China and the first major summit attended by post-Brexit Britain, both countries will be looking to make a statement. The UK’s task is easier: simply, to demonstrate openness to trade and a commitment to deregulation. Xi’s task, as the host, is much larger: to develop a coherent, and concrete, plan for economic development, beyond platitudes and aspirations. What might he pledge for China? Reform of China’s moribund state owned enterprises, for one; renewed efforts on the One Belt, One Road plan; mutual development in the South China Sea; perhaps allowing greater foreign ownership of Chinese industries (it is difficult to complain about being denied this in Hinkley Point when such things are far from even being contemplated in China). Xi will need to be seen to reform the Chinese economy before he can cajole others to revive theirs.

No doubt most of this has already been considered, as the signing of the Paris Agreements obviously were. Highly choreographed and worked through ahead of the event, summits rarely develop their own momentum. They are usually expressions of the domestic anxieties and wishes of the participants, rather than coming together to make a coherent plan. Often it is the staging and “optics” rather than the policy outcomes that contribute to a summit being declared a success. But President Xi’s drive to revive world trade looks genuinely resolute. With China the engine of so much of the world’s economic growth over the past ten years, it now needs a perkier world economy to maintain growth. The UK, meanwhile, needs to show it can flourish outside of the EU. Both countries need each other more than ever. Now there may be a real golden era in the two nations’ relations.

Published in Ni Hao magazine

Dark Clouds on the Chinese Economy

A bubble is never known until after the fact. I remember the dotcom madness of the late 90s, when absurdities were occurring like Boo.com burning through $188 million of venture capital in six months, with their TV ads achingly hip, but no doubt fearsomely expensive, and Yahoo! buying the Geocities web hosting site for over $3.5 billion when it never looked like turning a profit, despite then being the third most visited US website. (It was shut down 10 years later: an incredible rate of amortization). Yet while these colossal misjudgments seem self-evident, at the time no doubt intelligent people were urging them on. Hindsight is always perfect, of course, and it’s the easiest thing in the world to criticize the mistakes of others, but only in hindsight can errors like these be known: until then, they are cited as proof of “the new economy”. (The most horrifying phrase in business and finance is surely, “It’s different this time”.)

The question on many people’s minds is whether China is different, and whether it can get through what looks to surely be a deflating property bubble without causing a hard landing (a sudden slowdown). In many respects, of course, China is different. The effects of its economic boom have been unprecedented, transforming the world economy in areas as disparate as raw material markets and the US deficit. But to assess what’s currently happening in the Chinese economy is a difficult task, given its macro scale and unique position of being so large and yet still medium-developing. A wise provincial governor, rather than simply accepting the GDP figures presented to him by statisticians, used to look at the underlying figures, such as electricity demand and shipping volumes. When trying to do similarly, I am struck by some of the stories regarding the Chinese economy, despite it still reaching an annualized growth figure of 9.1% in the Q3 of 2011. Let’s look at the various aspects.

1 Local government debt in 20 provinces is over 100% of GDP. Following the economic crisis of 2008, the central government encouraged banks to lend and local government to borrow, to keep the economy buoyant in the face of a sharp decline in import orders from western nations. This was successful insofar as the economy kept growing above 7% (seen as the essential growth rate, below which the economy may fail to absorb new workers). However, the debts remain to be paid off.

2 As much of the money was issued by banks based upon bureaucratic channels rather than based on credit assessment by banks, the lending and spending too often went into unproductive areas. You may have heard about the “ghost towns”, entire cities constructed with not a solitary soul living there. Consequently, the rate of return on these loans is expected to be poor, leaving banks burdened by bad debts. As Reuters commented on October 10th, “Local governments had amassed 10.7 trillion yuan in debt at the end of 2010. The government expects 2.5 to 3 trillion yuan of that will turn sour, while Standard and Chartered [Bank] reckons as much as 8 to 9 trillion yuan will not be repaid — or about $1.2 trillion to $1.4 trillion.”

3 One of the main sources of funds for local government is land sales. At the moment, developed cities (and not just those in the richer eastern provinces) have astronomical land values (and consequently property prices). For example, Bloomberg (July 13th) cites Loudi, a city of 4 million in Hunan province, which issued 1.2 billion yuan ($185 million) of bonds, guaranteed by land valued at $1.5 million an acre. That’s about the same as prices in Winnetka, a Chicago suburb that is one of the richest U.S. towns, where the average household earns more than $250,000 a year”. Average incomes in Loudi, by contrast, are $2,323.

4 Consequently, property prices, as has long been well known, are extremely expensive, but with interest rates below inflation and few other investment opportunities, most Chinese feel there is no other sound investment. However, for prices to be sustainable, there must be willing buyers. Recent moves by the central government to tame property inflation by diminishing demand look to be increasingly effective; but perhaps there comes a time when people at the bottom can no longer afford to step on the property ladder. The Economist (October 23rd) noted, “the number of residential properties sold during the weeklong national-day holiday earlier this month—usually a brisk period for sales—was down by 72% compared with the holiday in 2007”. Prices in one district are down from CNY15,000 a square metre to CNY9,000, while “in March a company in the southern city of Shenzhen caused a stir after it cut prices by 20%”.

5 One of the most worrying signs comes from Patrick Chovanec, associate professor at Tsinghua University’s School of Economics and Management. He says that “With credit conditions tightening, [property developers] systematically ran through the credit lines available:  first the banks, then high-yield bonds in Hong Kong, then the private wealth management vehicles that have been popping up all over China, then the loan sharks.  Finally, they ran out of options, and had no choice but to start selling some of their inventory at whatever price they could get.” This perhaps explains why, as the Financial Times reported (October 9th), “the ‘big four’ state banks suffered a net loss in deposits of RMB420bn – more than four times their lending in the same period – as savers fled to high-yielding shadow banks.” Savers, and developers, it would seem.

I am sure there are still many signs of strength in the Chinese economy, too. The fact is still it is still growing at 9.1% a year and doubtless has a great pool of would-be buyers waiting for prices to drop to affordable levels. All the same, it shows the tightrope upon which Beijing is walking. These are very delicate days.

Published in Business Tianjin

Raising the Reserve Requirement Ratio

Turning round “the ship of state” is a greatly difficult task. Like a ship, countries and economies have enormous momentum behind them, in the form of trading relationships, business practices, and economic structures and agreements, and to alter these takes considerable time. Economies aren’t just numbers; they are aggregates of human efforts, of labour. It’s always down to people and relationships, and altering behaviours is a difficult process. Similarly, the markets like to have a sense of financial trajectory, a sense of where the economy is headed (the better to have a sense of where to invest). It’s when markets are faced with uncertainty, as with the ongoing euro-area financial imbroglio, that squeals of protest come through. Futurology is often a silly pastime, and it’s the easiest thing in the world to look at anticipations of the future which turn out to be erroneous, but governments do best when they articulate their economic frameworks clearly and confidently, and follow up with decisive action.

The Chinese framework until recently has been clear. The yuan has been appreciating at around 0.5% a month. The reserve requirement ratio (the proportion of a bank’s capital kept in reserve, in case of credit crunches or other problems) has been steadily rising to reduce liquidity. Supply-side restrictions on property ownership, such as requiring a 50% deposit on a second apartment, have been ratcheted up. These moves were all designed to cool the overheated Chinese property sector, which was reaching truly fearsome levels of bubbledom, and to gently encourage a move away from manufacturing for exports to the domestic market. These moves followed the Chinese custom of incremental reform, and with their pragmatic rationale seemed to have the approval of the markets.

However, events in the Chinese economy have been moving faster. Signs of distress in the housing market emerged during the autumn, with developers starting to offer sometimes large discounts to encourage buyers, who were starting to get thin on the ground. With developers highly leveraged, they needed to sustain sales to maintain cash flow, but with sales volumes considerably down (Business China cited a 57% drop in Tianjin’s November transactions, year-on-year), cost-cutting was the only way round it. Prices though were plunging faster than many would have liked: the Shanghai showroom which offered 25% discounts was smashed up by those who had paid the full price less than a month previously. This, though, isn’t the major problem it would be in western economies (as we’ve seen from the troubles in the US and the UK). China has a far less developed secondary market (the market for previously-owned properties), and would-be buyers are generally far less leveraged, tending to pay large deposits or even in cash. Most property owners assume that the government will ensure that prices do not drop too far, and without anywhere to invest except from stocks and property, it’s likely that there is a reserve of would-be owners waiting for prices to fall.

But such rapid falls in prices, alongside the endless troubles in the euro area which are depressing the European economies and their appetite for imports from China, evidently caused the People’s Bank of China (PBOC) some concern, despite Premier Wen Jiabao’s repeated statements that the government intended to curb rampant housing inflation. On November 30, the bank reduced the reserve requirement ratio for the first time since 2008, cutting it by 50 basis points from a record high of 21.5%, thus adding CNY 400bn of liquidity to the Chinese economy by freeing up capital for new loans.

This marked a clear change in China’s tightening policy and was (perhaps coincidently, perhaps not) concurrent with similar actions from the euro zone, Brazil, Indonesia and Thailand. Given the rise in unemployment and the dispersal of the low-cost manufacturing to cheaper countries like Laos and Vietnam, this may be a good idea. But on the other hand, it seems to indicate the unwillingness of the Chinese governing class to alter the current economic system without suffering the birthing pains of a new approach. If the role of a central bank is to remove the punch bowl before the party really gets going (a phrase attributed to William McChesney Martin, Jr., a former chairman of the Federal Reserve), then the Chinese economy has just been handed another round. The Chinese economic dependence on property is well-known (a recent poll of Chinese with between US $78,520 and US $157,000 in investments revealed that property made up 75% of their assets), yet the day of reckoning is always postponed.

A parallel might be the British experience of the early 1980s. Under the premiership of Margaret Thatcher, the British government greatly reduced the size of the state sector, cut the power of the trade unions, and let the pound float freely (it rose considerably with the new abundance of North Sea oil). The aim was to change to British economy from being over-manned and subsidy-dependent to one which was far leaner and meaner. This was done, but at some considerable cost: unemployment more than doubled by 1983, and some areas of the UK, like the north of England and the greater Glasgow area, have never recovered. Even now, Thatcher’s name is a curse in parts of the UK. Yet the UK economy, despite the recent travails, did reform, with considerable gains in productivity.

What the Chinese economy needs to do is well known. But whether it can be managed is another thing.

Published in Business Tianjin

Why is Google Like Chinese Doctors?

In China, scalpers blocking the supply of popular products, sadly, are common. One industry they plague is in healthcare – with hospitals selling tickets for doctor’s appointments at the open of business (around 7am), scalpers will queue up before the doors open and buy up the tickets, forcing late-comers to pay a surcharge. But there’s another problem with Chinese healthcare that brought to mind Google’s success – though not in a good way.

Why is Google – at least their core search function, anyway – so insanely effective as a business? This is a company that is only fifteen years old, remember. Quite apart from having an immensely useful search engine, their business model is inobtrusive and psychologically sound, in comparison with Facebook for example. Facebook may have a gargantuan amount of data on its users, but using that in a way that isn’t distracting or presumptuous is proving difficult. While Facebook may know that I like John Coltrane, Phillip Larkin and Guinness, I simply don’t want to see adverts for them, or for “similar” products.

Google, on the other hand, delivers advertising (those “sponsored results”) when you are seeking information. This makes a fundamental difference to its efficacy. Instead of blurting out ads when you’re just trying to have a conversation with your buddy from way back, Google gets you when your mind is open to persuasion. This is hugely important. No wonder that there’s a whole industry devoted to getting websites up the Google rankings, and no wonder that people will pay good money to be a “sponsored result”: they get you when you are at your most open to suasion, and thus most susceptible to advertising.

Google’s dominance of the non-Chinese search market (67% of US search, 89% in the UK, and around 88% worldwide – I think only Russia and China have domestic examples which dominate) make it a virtual gatekeeper for information. What’s the annual average rainfall in Lima? How far way is Neptune? Why do birds appear every time you are near? Where can I find a good vet in Beijing? While there might be good local instances of websites able to answer these questions, in general you gotta google it. (Whenever a brand name becomes a verb, you know you’ve made it. Just ask Sellotape.)

Being gatekeeper to the digital world gives Google tremendous power. Fortunately it seems aware of this, and I would argue has comported itself well, considering the temptations. (Although some might disagree). Their support of net neutrality and espousal of freedom of information across borders is laudable. (Of course this presupposes a distinct worldview, which some would argue with, but that’s another argument). But we can see other examples of gatekeeping which aren’t so benevolent.

Take Chinese doctors. They are unfortunately renowned for plugging unnecessary medicines, perhaps at the behest of the drugs companies, perhaps just for the hospital in which they serve. Salaries are low and the business model (that is, the corrupt practises) is endemic. This isn’t to say that all doctors do it, but it’s happened perhaps half the time either myself or my wife have required any medicines. (Similar commercial imperatives can be observed in the American system too, of course). A doctor’s function, at its most basic, is to provide information (diagnosis) and deliver the product (the healthcare) – just like a search query and clicking through to the result. Just like Google, the doctors are the gatekeeper: you go to hospital when ill, seeking information and products to make you better, and they provide that. As with searching Google, you are susceptible to whatever the doctor says. Who would argue a doctor’s diagnosis?

But people aren’t stupid, and trust towards the profession has fallen, leading to rising violence. The medical profession here has encountered significant animosity from the perceived manipulation of its gatekeeper status. To be a gatekeeper is to to be perceived as a neutral dispassionate pathway to a desired outcome. Lose that, and you aren’t a gatekeeper but a roadblock, and liable to get knocked down. Or worse.

Taxi Torment: What’s Driving It?


For once I agree with Global Times: their headline “New rules won’t end taxi torment” is quite right. We all know how difficult it is to flag down a cab during rush-hour, i.e. between 5-7pm, and in some particular locations and time zones. If you’ve been on a night out to Nanlouguxiang or Houhai and are trying to get back home after 11pm, good luck in trying to find a cab take you home for the mandated price. I would estimate ninety per cent will try to gouge you. The same at the train station: once I came back from a visit to Tianjin on the last train. The drivers stood at the exit like a gang of striking pickets, demanding outrageous prices (around RMB200 for an on-fare RMB40 journey), and preventing non-gouging drivers from picking up passengers reluctant to be scalped. Fortunately a five-minute walk down the street took us (I was with my wife and young daughter, and it was pouring rain) into the vicinity of fare-accepting drivers and we got home fine. But more often I am left stuck – working in CBD and regularly needing to attend evening events, I often have to accept glorified scooters, black cabs and gouged fares in order to get to a venue without being outrageously late. No chance for a fapiao either!

However, despite my irritation at drivers passing me by, waving their hands or simply sitting at a junction, I understand the cabbies’ position. The new rules will not work. It’s a simple matter of economics. Per Global Times:

The new regulations, issued by Beijing Municipal Commission of Transport, stipulate taxi companies could face closure if it is discovered they have received too many complaints, such as drivers refusing to pick up passengers at peak times.

Drivers who severely violate rules such as refusing passengers, taking detours, and bargaining will be barred from cab driving for three years.

OK. So there’s a stick or two, but no carrots. But this of course fails to address the root cause of why are the cabbies refusing to pick people up. It’s simply because at rush-hour, they are losing money. They are not driving far enough in that time-frame to create a large enough fare. With traffic congestion on the third ring road bumper-to-bumper, and the fourth getting more clogged by the week, rush hour traffic means you ain’t going anywhere fast.

Let’s look at the raw facts as a cabbie sees it:

Monthly franchise fee – RMB4500

Gas per gallon – RMB30

Taxi fare – RMB10(+2RMB per km over 3km)

Surcharge – RMB2 when over 3km.

Therefore just to make a profit, a cabbie has to bring in over RMB4500 above fuel costs, per month. Let’s say they work 5 days a week – about 22.5 working days a month – that’s RMB200 a day over fuel costs just to make a profit. That’s RMB20 every hour, if they’re working a 10-hour day. Remember this is just to avoid making a loss.

So let’s say that you want a journey at rush hour for less than 3km. The fare for these journeys is RMB10. However, with congestion, they can take up to 30 minutes (let’s say) – I’ve certainly been on journeys where that’s been true. Your Hyundai Elantra gets roughly 25 MPG (40km/gallon). The fuel cost will be around RMB3, and likely higher, bearing in mind idling, which decreases efficiency. In 30 minutes, therefore, your cabbie has earned a maximum of RMB7, and more likely closer to RMB5. Add in wear and tear to the car, and it’s virtually nothing. And keep in mind that they have to make an average of RMB20 per hour every hour just to avoid making a loss!

No wonder they won’t drive in rush hour.

In reality, just to make a moderate living of say around RMB5000 a month, they need to average a profit of RMB220 per day. Which means bringing in RMB200 (franchise fee per day) + fuel costs + RMB 220 (profit). I don’t know how many miles they drive daily, but New York cabbies drive around 180 miles a day. Using that as a yardstick, that’s 7.2 gallons, or RMB216. So per day they need to pull in RMB636 to make a blue-collar living. Your rush-hour fare that brings in RMB10 in half an hour ain’t going to cut it. Would you work for nothing in real terms, in the most stressful working environment your industry offers?

No wonder, then, that cabbies try to gouge customers when they can. If they do pick up customers during rush-hour, they have to make the profits up elsewhere. The only times that demand outstrips supply are at bottlenecks like Houhai, Nanlouguxiang, the train stations, and Sanlitun after hours. While demand and supply might be at equilibrium during rush-hour, it simply isn’t profitable to take passengers then. Moreover, if cabbies are seen to refuse rides, they put themselves at risk of loss of license or franchise. Little wonder that most just sit there. Why entertain the risk?

There is, of course, a simple solution to all this. Let the market operate. Let a variety of taxi companies operate. Some can operate out of hours and charge more. Some can offer more plush cars and charge more. Raise the minimum charge to RMB14, or RMB16 or whatever. When you can get across town for about US$8, there’s surely room to raise prices. As it is, the only people profiting from the taxi situation are the Beijing taxi firms. And I don’t see why they merit any sympathy.

Why Are Chinese Property Agents Like The Apple Store Rioters?


Finding a place to live in Beijing is one of the most onerous and grating tasks for anyone in the city. It just ain’t easy. While many media outlets try to bring transparency and clarity to the capital, it often appears that opacity, obfuscation and information-withholding are founding principles of the People’s Republic. This data-poverty pervades the city (and country) in many ways: from the street-level difficulty in finding addresses (why do so few buildings have numbers?) to the unaccountability of those in power, at any level. Every English teacher at a state institution will have stories of sudden arbitrary demands or turning up to teach and discovering the building is suddenly a building site and no-one thought to tell them. (And the rule goes all the way to the top, of course. The “black box” at Zhongnanhai, as foreign correspondents occasionally ruefully admit, has never been cracked).

Thus, information about accommodation can be hard to find, which therefore makes making an informed decision about where to stay difficult. While ex-pat websites like theBeijinger, along with local sites like Sina Zufang and Ganji do offer accommodation ads, these are largely monopolised by agents posting ads which generally have little similarity to the properties they claim to be advertising. But while these ads are moderated, short of verifying each and every post, there is little an open site can do. The tactic on the part of the agents is however conscious, indeed deliberate. While they may perform a service in promoting properties that non-English speakers cannot, their strategy is to insert themselves between the owner and renter, making it impossible for the two sides to come together without them. Worse, the information posted is often false. That nice 2-bedroom apartment in Gongti Bei Lu with a (relatively) big kitchen? It’s actually a 1-bedroom flat in Hepingli, but would you still like to see it? That sweet-looking pad with the new sofa, TV and DVD player? It’s a tiny shithole with dead roaches on the kitchen floor. It’s still RMB4000 a month, but hey, lots of people want to view it, so you should take it now, yes? (This has literally happened to me).

The insertion of an artificial link in a chain of commerce can be infuriating. While property agents might have a purpose – if they act as a middle-man between you and the landlord, helping with contracts and repairs – in China it appears that they merely introduce you to the landlord and provide no other service. For a payment of a month’s rent, that is a preposterous fee for a negligible service. But given that their entire business model is based on preventing either side being able to come together with full information, they are doing “a good job”. (I don’t mean ethically good, of course). You have to go through them. Users of every property website are deluged with misleading adverts, burying the genuine posts from actual individual landlords who have one place to rent. Meanwhile 5i5j and their ilk have numerous agents posting several ads a day, often from several accounts, so that you can never tell what is real and what is commercial. The muddier the water, the better. Disinformation is the name of the game.

What therefore happens is that you call someone upon seeing a promising apartment; it turns out to be an agent, and they take you there. It sucks, so he offers to take you to others. In agreeing, you are reliant on the agent for information on the housing market. You are also forced to view numerous properties in able to be able to make an informed decision. Efficient, this is not. Not in a city of 20 million people. But it effectively makes you dependent on the agent, which is their entire industry game plan. If you were able to glean the information you wanted, their business would not exist.

This parasitic obstructionist business model, to coin a phrase, is a danger in every industry. There’s always some middle-man trying to wedge themselves into some line of business. (Think about trying to buy a ticket to see a doctor at a Chinese hospital!) Take Apple, for instance: they are famous for the vertical integration of their business model, where they “manufacture hardware, develop the software to run on the device, control the delivery of, and make money from the sale of, content through tightly bound distribution channels such as the the Apple shops, iTunes, iStore and iBooks”. Everyone wants a piece of them, and they’ve been very successful at preventing it. With design and software done in-house and sales controlled via the closed ecosystem of their various iStores and Apple stores, Apple is a textbook example of preventing these parasitic layers coming between any of the links in their business model.

However, there was a recent attempt on Apple’s integrity that we Beijingers will recall. You probably heard about the mini-riot outside Apple’s Sanlitun store for the release of the iPhone 4S in January 2012. This, contrary to common belief, was not caused by overexcited Apple fanboys. The egg-pelting and aggression were down to disappointed scalpers paid to wait overnight to be first in line in order to prevent regular customers from buying one when they wanted. The aim of course was to subvert the logistical chain of company to consumer, so scalpers could profit from the eagerness to own the latest iPhone after the death of Steve Jobs. The bottleneck of people crushing around the store is an clear instance of process breakdown. It was an obvious attempt by a parasitic obstructionist business model to insert themselves into Apple’s logistical chain. Fortunately Apple on the release of subsequent products have reduced it by a reservation system and photo ID.

In both cases, accommodation and Apple, there is profit to be made by obstructing the free flow of trade. One depends on blocking information and access; the other relies on seizing up the commercial process. It is worth always remembering that free trade is not something that occurs naturally. It is dependent on strong institutions and strong law enforcement. In China we’re still on the way there.