Doris Gallan, an American who has lived in China for years, wrote: “The way [...]]]>

In my last post, I wrote about the trend in Chinese consumption being significantly upwards. Some people commented on my Facebook and LinkedIn groups that they believed China’s consumer market would be much larger if it were adjusted for the exchange rate.

Doris Gallan, an American who has lived in China for years, wrote: “The way people shop in Wenzhou, China — they are aiming to be the #1 consumer nation! There are many high-end consumer stores here and people (especially youths dress very fashionably and drive expensive cars).”

While the Chinese middle class (see my definition of the Chinese middle class) will alter the global economy in the years ahead, there are obstacles to Chinese consumers increasing their spending. Most people I talked to save 25 to 50 percent of their monthly income for a rainy day.

Although decades of double-digit growth have instilled widespread optimism in Chinese people (a recent survey by Economic Intelligent Unit indicates that 91 percent are optimistic about the future), many of them are also living under extreme anxiety. They observe that some people suddenly become rich, while others remain poor. They are worried about being left behind.

One of the major causes of anxiety is China’s inadequate health care system. Before the 1980s, health care was essentially free in China. In urban areas, state-owned enterprises usually covered at least 90 percent of medical expenses for their employees. In rural areas, peasants had basic medical treatment at minimal expense.

The economic reforms abandoned the old socialist “cradle-to-grave” welfare system. The government dramatically reduced funding for health care, although a new and effective social safety net was not yet in place. Hospitals began to focus on the bottom line rather than providing quality medical care. Many doctors were under pressure to prescribe highly profitable drugs, and charged steep fees or took bribes for seeing patients and performing operations.

Soaring fees made medical services less affordable to ordinary people. Many set aside large chunks of their income to self-insure against health care costs. Victor Ku, a hotel manager in Guangzhou, told me that he saved two-thirds of his income. “I have to pay for my own health care expenses,” he said. “In China, we don’t have security. If you get sick, you can immediately become poor. The government is not going to take care of us any longer. So we need to save to take care of ourselves.”

The Chinese government understands the challenges and is taking steps to establish a stronger social safety net. In 2009, the Chinese government announced a plan to spend $124 billion to overhaul the country’s broken health care system. The government’s ambitious health care reform to ensure basic health care coverage for 90 percent of the Chinese population is a first step in the right direction.

There are many opportunities for technology companies, health-services providers, insurers, and pharmaceutical companies in China’s fledging healthcare industry. The Wall Street Journal reported that IBM is deploying technology to help thousands of scattered hospitals in China standardize medical records. The market for health care software is expected to reach $2.4 billion by 2013. Dell and Microsoft are racing to secure a slice of this huge potential market. Analysts also predict 16 to 20 percent growth in China’s medical devices market from 2010 to 2015.

Currently, China’s private consumption accounts for 35 percent of GDP, compared to 70 percent in the United States. Stephen Roach, Morgan Stanley Asia’s chairman, believed that if the Chinese government moved aggressively on developing social security, pensions, and nationwide medical care, consumption could achieve a 50 percent share of GDP within five years.

(This article is adapted from The Chinese Dream).

The trend in Chinese consumption is significantly moving upward. Retail spending has increased steadily at 15 percent [...]]]>

A recent study by the Economic Intelligence Unit indicates that Chinese consumers only make up 5% of the world’s $36.9 trillion consumption. However, we need to keep in mind that the Chinese consumers barely existed about a decade ago.

The trend in Chinese consumption is significantly moving upward. Retail spending has increased steadily at 15 percent and more in recent years. Chinese consumer confidence remained high even during the worldwide recession in 2008-2009. China has already become the world’s largest market for automobiles, television sets, and cell phones, and the world’s second largest market for luxury goods.

Walking on the streets of China’s bustling cities, one can easily witness prosperity and the consumer boom. Xujia District in west Shanghai, erected from the ruins of abandoned state-owned factories, has become a shopping mecca. Tall department store buildings inundated with thousands of boutique stores and mom-and-pop shops sell familiar global brands like Nike and DKNY. Here you can find everything from jewelry to digital cameras and automobiles within a five-minute walk. On average, about eight hundred thousand people visit the shops daily.

Zhu Yiping, a young entrepreneur who started a Chinese version of Victoria’s Secret, told me that young Chinese consumers are quick to accept new brands and new products because they have no consumer habits inherited from their parent’s generation. For example, men’s dress-shirt maker Perfect Products Group (PPG) enjoyed a huge success when it launched a marketing campaign that used top-name celebrities to brand medium-priced products targeting white-collar workers.

Chinese consumers’ spending patterns are expanding to service industries, as Chinese splurge on travel and entertainment. In a 2007 survey, middle-class Chinese said they belonged to fitness clubs, dined out three times a week, and traveled within China twice a year for pleasure. Because China was closed for half a century, many Chinese also desire to see the outside world. They make traveling abroad one of their primary goals in life. In 1993, when I took a trip to Italy, people mistook me for Japanese, as there were very few Chinese traveling overseas then. In 2007, I went to Egypt and met many Chinese tourists. Most of them were in their twenties and early thirties, touring the pyramids and posing for photographs with their fingers showing a “victory” sign.

In recent years, some have taken up expensive sports, such as skiing. In the winter of 2008-2009, about three million middle class Chinese went skiing, a sport that was unavailable only fifteen years before. China now has around three hundred ski runs, including some in the subtropical south where people can ski indoors. At Nanshan Ski Village, a ski resort near the northern city of Harbin, they manufacture snow from wells deep underground. Every weekend, IT executives, bankers, and media literati pack the resort.

Changes in consumption habits are evident in the exploding use of consumer credit cards. In 2005, there were thirteen million credit cards in China. Only three years later, the number had increased to 115 million. Online shopping is increasing dramatically, aided by the increased use of credit cards. One hundred and twenty million of China’s over 400 million Internet users shopped online.

Yes, there are major obstacles to Chinese consumers increasing their spending, which I will discuss in my next post. Studies predict that the Chinese middle class will wield enormous spending power as it reaches 600 million-800 million people in fifteen years. As their incomes rise, so will consumption, making China the third-largest consumer market in the world after the United States and Japan.  Stanford professor Michael Spence, Nobel laureate in economics, and Shaun Rein, founder and managing director of China Market Research Group (CMR), both told me that China might very well exceed Japan to become the second largest consumer market in the world.

Achieving greater energy efficiency has become a top priority of China’s leaders. According to China [...]]]>

China has surpassed the United States to become the world’s largest energy user, according to Paris-based International Energy Agency. As a growing Chinese middle class demands cars and homes with modern appliances, it will continue to drive up China’s energy consumption.

Achieving greater energy efficiency has become a top priority of China’s leaders. According to China Daily, China’s state-owned State Grid Corp. plans to invest $586 million constructing smart grids that incorporate wind and solar energy, energy storage, energy transmission monitoring, intelligent substations, and smart meters.

There are plenty of opportunities for Western companies in China’s soaring clean tech industry. Green Chip Stock, an investment research service, reported several promising deals by Western companies in China’s booming smart grid market:

Last month (May 2010), Siemens (NYSE:SI) struck a deal with holding company Wasion Group (3393:HKG) to conduct feasibility studies in an effort to launch new smart grid pilot projects in the Middle Kingdom.

IBM (NYSE;IBM) is investing heavily in China’s smart grid future, having just recently unveiled its Energy and Utilities Solutions Lab in Beijing. According to management, IBM expects the China revenues of its energy and utilities division to grow by $400 million from now until 2014 – thanks primarily to China’s smart grid development.

And GE (NYSE:GE) recently announced that it will be partnering with the City of Yangzhou to build a smart grid demonstration center. The goal will be to deploy some of the tested technologies within four years.

Cisco, Accenture, Hewlett-Packard, and Oracle are also vying for a piece of China’s smart grid boom.

Over the next 10 years, China is expected to spend more than $100 billion upgrading its power distribution system. As Jack Perkowaski wrote on Forbes China Tracker blog, China’s smart grid market is dominated by a few large state-owned companies. However, if a company has the world class technology, it will find a receptive market in China.

At the time, I had just arrived in the United States as a [...]]]>

Twenty-one years ago, thousands of Chinese students gathered at Tiananmen Square demanding more democracy. The world still remembers the stunning image of a lone student standing in front of armed tanks in an attempt to block the tanks from entering into the Square.

At the time, I had just arrived in the United States as a student and watched the entire demonstration on TV. Like other Chinese students in the U. S., I protested with them on the streets and wept with them when the crackeddown came.

Twenty-one years later, China has changed to a very different country. Today’s new middle class Chinese have little in common with the idealistic students. They are the beneficiaries of China’s economic reform. Most of them approve what the government has done. They are all busy trying to keep up with the swirling changes.

Geng Hui, an interior designer in Beijing, told me that he couldn’t care less about democracy. “I have all the freedom to do the things I want,” he said “I have more opportunities than I can pay attention to.”

“People don’t care about politics now,” Veronica Chen, a young woman who started her own executive search firm in Shanghai, said. “They only care about having a good life and being trendy.”

Some people I talked to said they wished that their rights were better protected, but they also understand that China is a big country and it has a lot of complex problems. They are concerned that if the Communist Party is not in power, no one else is capable of running such a large country with so many problems.

The truth is that the Chinese middle class and the Chinese government want the same thing – continuing economic growth and stability of the country. When it comes to choosing between democracy and stability, they choose stability over democracy.

Although the Chinese middle class does not want radical changes, they have started to voice their opinions and show signs of power that never existed before. The Internet and mobile phones have played a significant role in this process.

In November 2008, China rushed through a 4 trillion yuan ($585 billion) economic stimulus package. People debated vigorously in blogs and online media about how well the plan was constructed. Critics inside and outside the Communist Party pressed for details about the spending and demanded the right to follow the money.

A Shanghai-based lawyer, Yan Yiming, filed a lawsuit against the National Development and Reform Commission (NDRC), China’s de facto central planning agency. Although Yan’s suit was rejected by the Beijing High People’s Court, a lawsuit against the central government was unprecedented.

In May 2009, the Chinese government issued a statement to require all the computers sold in China to pre-install spyware called “Green Dam Youth Escort.” China’s 300 million Internet users strongly opposed installation of the software. After weeks of criticism from the public, the Chinese government backed off, and later announced that “Green Dam” was no long required to be pre-installed on new computers.

These are just a few examples of how the Chinese middle class pushes back and demands more protection for their rights, property, and privacy.

Many people I talked to expressed that “only when we have economic freedom, will we have political freedom.”

Evidence from other countries, such as South Korea and Taiwan, suggests that when countries advance economically, they begin to change politically around the time that their middle–income status reaches somewhere between $5,000 and $10,000. If this rule applies to China, it will not be too long before we will see a democracy in China.

In fact, a former Tiananmen Square demonstrator / student leader told me that he believes China will have a democratic elected government in 10 years. I am hopeful that as the Chinese middle class continues to grow, democracy will arise in its time.

RAY SUAREZ: And for more on that relationship, we turn to Kenneth Lieberthal, a senior fellow at the Brookings Institutions and former National Security Council staff official dealing with China in the Clinton administration, and Ted Fishman, a journalist, former trader, and adviser to companies operating in China. He’s the author of “China, Inc.: [...]]]>

Transcript (partial)

RAY SUAREZ: And for more on that relationship, we turn to Kenneth Lieberthal, a senior fellow at the Brookings Institutions and former National Security Council staff official dealing with China in the Clinton administration, and Ted Fishman, a journalist, former trader, and adviser to companies operating in China. He’s the author of “China, Inc.: How the Rise of the Next Superpower Challenges America and the World.”

Kenneth Lieberthal, you saw it, an enormous American delegation, a fleet of 50 cars to haul them from place to place. When you see a meeting like this, can you conclude that, for America, this is the most important bilateral relation in the world?

KENNETH LIEBERTHAL, Brookings Institution: I think, effectively, it is. China next year will have the world’s second largest economy, behind only ours.

Whatever global issue you think of, whether it’s nuclear proliferation, touching on North Korea and on Iran, whether it’s global climate change, where China is the largest greenhouse gas emitter in the world, ahead only of us, or whether it’s the major economic issues of our day, the capacity of the U.S. and China to work reasonably well together is crucial to managing those problems reasonably effectively.

If we go at cross-purposes, those problems become much more difficult. So, yes, I would say we have a number of very important relations, but if there’s one that stands out, it’s our relationship with China.

RAY SUAREZ: Ken Lieberthal, what do you think of that formulation, the G2, the two countries that really make things happen?

KENNETH LIEBERTHAL: I think, frankly, it’s a terrible formulation. It’s terrible for two reasons.

One is that it’s hard to think of a major global issue where the U.S. and China can simply drive the outcome by itself. So, I agree very much with what Ted just said, that we need our partners, to a greater or lesser extent, on almost every issue.

Secondly, to the extent that the U.S. and China talk about a G2, other countries will be less willing to cooperate with us on these issues, because no other country will accept easily the notion that the U.S. and China should decide the big issues largely on their own.

So, to be effective, we need to work well with the Chinese, and we absolutely need to work well with the other major players around the world.

RAY SUAREZ: Ken, when you make a splash like this in a bilateral conference, send a large delegation studded with top names in the administration, and come home with some assurances here, but nothing really nailed down, no progress on Korea, is it worth going? Should some of this stuff be done before anybody gets on a plane?

KENNETH LIEBERTHAL: Well, actually, a lot of it is done before anyone gets on a plane. The staffing for this kind of meeting is extraordinary.

Most of what you see come out of it is largely scripted. The kind of unexpected element here, clearly, was North Korea, where the situation has changed very rapidly even over the past week. I don’t think anyone expected major agreements publicly announced at the end of this conference.

This dialogue, unlike most U.S.-China meetings, is aimed at — fundamentally at deepening mutual understanding, periodically making sure that our relationship is moving in a more positive direction. And I think, I hope, at least, over time, it will lead to long-term efforts to get at issues like protectionism in China, management of the nuclear issue, better cooperation among clean energy and climate change, and so forth.

So, looking for what are called deliverables is not really the right measure for this particular dialogue, this strategic and economic dialogue.

RAY SUAREZ: Ted, Treasury Secretary Geithner was especially interested in opening up the Chinese market, after hearing some recent noises about China favoring domestic industries, also very interested in getting some accommodation on the currency exchange rate between the American dollar and the yuan.

Any progress? And why is it so important that these things get done?

TED FISHMAN: You know, I don’t think there was any progress.

This is the kind of discussion we have been hearing for a long time. What’s different right now is that American industry, particularly the large global multinationals that have bet so much on China to deliver them significant growth, are getting frustrated, because China really wants its domestic players to have a strong hand in China’s market.

China’s doing what it should for its country. It’s making its own domestic players as strong as they possibly can. That’s what we would do. On the currency front, China is giving the same kind of empty rhetoric it’s given for a long time, and playing its own game, also to its own advantage.

China is pegging to the U.S. dollar as a level lower than its market rate as part of China’s industrial strategy. It promotes China’s exports. It’s gotten China to where it is today. And they’re willing to talk somewhat nicely, but stick very much to their playbook, as they have.

Today, these phrases sound more like clichés. But [...]]]>

In January 1989, I came to the United States to pursue my graduate study. Like thousands of Chinese students, coming to America was not merely a chance for academic advancement. It was a way to seek a better future in this “land of opportunity” and “country of freedom.”

Today, these phrases sound more like clichés. But for those of us who had not known the meanings of words like “opportunity” or “freedom,” America was a place for the impossible, a romantic version of what the world was not, and a fantasy land with the glittering skyline of New York City, wild cowboys in California, and humming boatmen on the Mississippi River. For me, America was a dream coming true.

Shortly after I arrived, I went on a school-organized field trip to Washington DC for a conference. The world was still in the grip of the Cold War. Even to this day, I still cannot fully grasp what it must have meant for me who grew up in a country where the United States was viewed as an enemy. I visited the White House, National Museums and Memorial Parks. The chilly winter air could not inhibit my exuberance.

As I stood at the Lincoln Memorial and read the Gettysburg Address, the reality that I was really in a free country finally hit me. I found myself at a loss for words and overwhelmed by my emotions. I remember the afternoon sunlight casting long shadows of the Lincoln Memorial, and flocks of birds flying freely above the Reflection Pool, and viewing the capital from the top of the Washington Monument.

Later that afternoon, I took a walk on the National Mall. Along the way, I was about to sit on a bench and eat a Sandwich I bought from a street vendor. I was thrilled to see those birds flying closely around me, as if they were enjoying the freedom with me. Some of them landed on the ground, picking up left-over food. Suddenly, a bird dove toward me. Before I realized, it grabbed a big chunk of my sandwich and flew away. I was dumfounded. “This is indeed a country of freedom,” I thought to myself. “Even a bird can pick on me.”

In China, this would be totally impossible. All the birds were afraid of people. They would never dare to be near any person, not to mention to rob food from a human’s hand. Otherwise, they would most likely end up at someone’s dinner table.

I remember seeing a boy who caught and killed a bird in such a wicked way, and we – a group of what seemed heartless adolescents – all cheered for him. He must have been around fifteen at that time because we teased him for the sparse young hairs on his upper lip. We called him Big Brother as he was the oldest and acted as a “pact leader” among us. But in secret, we called him “Little Mustache.” I remember that Little Mustache wrapped the poor bird with chunks of wet mud and choked it to death. Then he threw it onto a hot coal stove and cooked it for his dinner. We were all excited, screaming and jumping around as we watched Litter Mustache roast the bird.

It didn’t occur to any of us that this was inhumane, cruel, or perhaps a violation of the animal’s rights. In a country where food was rationed, some people were starving, and eating meat was considered a treat, the concept of protecting animals, or the environment for that matter, was then non-existent.

That was my first taste of freedom in America.

Twenty years later, China has changed to a very different country. Each time I went back, I saw amazing changes. Its cities are bigger, skylines more impressive, and more things are happening there than in any other part of the world…. (To be continued).