Saturday, February 16, 2013

Things I noticed from my China trip

I just got back from China this past Monday. I haven't been there for almost 7 years, so it's really a good opportunity for me to be on the ground to see for myself the issues that China and its citizens are dealing with. I've taken some positions on Chinese economy and government, so I wanted to talk to people there to see how they feel about different issues.

First of all, I will just talk a little bit about the small number of military related stuff I noticed while I was there. It seems to me that a good number of Chinese citizens think that a war with Japan might happen. Watching TV, it was interesting to see the number of political/military show talking about possible conflict with Japan. I also saw programs celebrating Chinese heroes from the Sino-Japanese war of 1937-1945. There is certainly plenty of anti-Japanese sentiment in China right now. There is a lot of pride within China over the achievements of PLA in the past year. Certainly, the commissioning of Liaoning and the first takeoff/landing of J-15 have received the most press. The recent test flight of Y-20 transport has also brought a lot of excitement. Also, I took a flight from Yantai to Beijing while I was in China, so used the Yantai/Laishan airport. Luckily, this also happened to be a civilian/military dual use airport. As my plane was taking off on the runway, I actually saw the JH-7A fighter bombers outside of their shelters, so I took a couple of pictures. I'm pretty sure they were the reason my flight got delayed.



Secondly, let's talk about some of the good things that I saw while I was back there. Xi Jinping's call for curb to extravgance is really working. While I was in Beijing, everyone was telling me about the reduction in these excessive banquets, gift giving and extravagance. A lot of local officials are going overboard in frugality in public in order to impress higher ups. Even in state companies, banks and universities, end of the year banquets are not being held with the fund being reallocated to those who really need the money. The official call for less waste seems to even affect the day-to-day lives. It's definitely good to see this kind of change after years of over abundance under previous administration. The other thing I noticed was how much richer everyone has become since my last visit. While I was in Beijing, it seemed like anyone that has good education and registered in Beijing are very well compensated even by first world standard. The living standard has definitely gone up a lot in the recent years. Even in some of the secondary and tertiary cities, you can find most of the products that you can find in the West. There is definitely a large and growing middle class who are enjoying their new found wealth. I don't know if this is a good indication, but there was a proliferation of Apple product everywhere I went. That's a welcoming news in light of China's desire to shift from an investment based to a consumption based economy. Along with this, it's quite apparent that the amount of available cheap labour has decreased a lot in the bigger cities. In previous times I visited, there were a lot of excessive labour doing jobs which really were not needed. For example, there were more typically more employees in restaurants than people eating there. There were also a person paid to press elevator buttons in pretty much every residential building. Due to the rising living cost and reduced number of cheap labours, businesses have become a lot more efficient. Finding employment is still a big issue for most municipal government, so I think the entire talk of drying up of Chinese labour pool is started by people who have never been inside the country.

A couple of other things I want to address are issues that I saw before I visited. I think the housing market is not as inflated as people think. I have often read about how real estate is overly inflated based on the cost of housing to average salary. I think that overlooks the fact that the actual salary is a lot higher than the officially reported numbers. What I noticed this time back is that secondary income (gifts + bribery) for a lot of well off people are many times their regular income. On top of that, people who have retired from state companies often get the same salary as if they have never retired. When it comes to purchasing real estate, this extra secondary income in addition to support from retired parents allow most couples of purchase places that their regular income would never be able to support. There are also rich people that buy many apartments in big cities because they like to own excessive number of properties to show off their wealth. So while real estate is inflated from market speculation and excessive liquidity, the situation is not as bad as the raw numbers would indicate. The other issue is the so called hidden debts in China. The idea that many Chinese banks carry debt from bad investment/non-performing loans and would need to eventually be bailed out by the government. What I noticed was that the lending practice in China is no where near as bad as what I read about in Western news. Also while there are probably 2 or 3 banks that Chinese government implicitly guarantee, it will allow other banks go under for their bad decisions. Either way, the Chinese banks (like their American counterparts) are making a lot of money at the current time.

Having said all of the above, there are also a lot of things that were worse than what I thought. I think that the entire registration system in China creates two class of citizens. In Beijing, those who are born there generally have good jobs, own properties and live comfortably. They also have access to public education system and health care. These privileges are not extended to migrant workers who do most of the hard labour jobs, because the Beijing government can't afford it. In order to address employment issues, certain jobs (like driving taxi) are only available to residents of Beijing, so migrant workers are left with jobs that Beijing folks don't want to do. While I was there, business all shutdown because all the migrant workers went home for Chinese New Years. There are also 4 major issues that I think are problematic to China:

  • Pollution - This has to be the biggest problem. Most of northern China was under smog conditions for much of January. I wore a doctor's mask anytime I was outside and at least half of the people I saw were doing the same. During the first week I was there, it was uncomfortable to breathe when I was outside. Thankfully, wind from Mongolia blew away the smog for the second week, so things got better. I can see efforts by local government toward improving the environment, but it's hard to do so with increasing number of urban residents and cars. Most of the major cities in China are heavily polluted now. While my hometown improved since my last visit, Beijing was much worse this time around. People can't even do outdoor sports due to the bad air quality. There is no question this is a huge strain in the public health care system. China will also find it harder to attract foreign talents until they can clean this up a little bit.
  • Corruption - This is almost as big of a problem as pollution. I think everyone knows that corruption embeds in the entire Chinese political system. In Beijing, anyone associated to government probably get more under the table than their official income. What I found shocking was how wide spread this corruption level is in other facets of the society. Pretty much anyone that has any kind of leverage will get gifts, red envelopes and other form of bribery under the tables. For examples, doctors get gifts (sometimes demand that) from patients, kickbacks from drug companies and equipment manufacturers. Any kind of procurement result in a lot of gifts for middlemen and those giving out the contract. Schools get bribes for allowing students with lower grades into their school. I was told that even people who don't want to take bribes end up doing so because they would otherwise be hard pressed to live a regular less style on their regular salary. It has become a regular part of life. Many people who gain from this system send their children abroad because they are concerned about being implicated in one of the anti-corruption campaigns. As one of my relatives said, "Unlike America, China is not a law based society. All the rich people send their family abroad because they are worried this system will turn against them. They want to have the option to leave the country if things turn against them or if China goes back to its former communist system. If I can send my family abroad, I would do so too." One of the major reasons that China has such stringent capital flow laws is because it's worried that money from all of the corrupted officials and rich people will flow out of the country. Chinese public has no trust toward their government but do have very high regard for the American systems. One of the people I talked to was surprised that I also have no clue how my local government is spending my tax dollars. Even with all of the reported corruption in the American political system, it's still child's play compared to the complete black box of the Chinese system.
  • Piracy/Counterfeiting - While many people associate Chinese piracy/counterfeiting to Chinese copies of Western products or fake parts found in American military hardware, this problem is so much wider spread in China. I think many people have heard about the milk scandal in China from a few years ago, these problem of food/drink counterfeiting is everywhere. Brand name liquor like Maotai, Wuliangye and cigarette like Zhonghua are widely counterfeited due to their limit production and the rising income levels. In fact, it's very hard to find legitimate versions of these products. I was told that you can't find real Maotai in any of the restaurants in my hometown. Food counterfeiting has become so professional that even the lamb that people eat in hot pot are often pork soaked with lamb oil. The Chinese public have very low trust toward consumer products. When people buy brand name products, their biggest worry is not cost but fake products. This probably explains why brand name stores can charge outrageous prices for their products. One of the interesting part of this is Internet. While I was there, YouTube, Facebook and twitter were all blocked (Google services were inconsistent). According to the locals, there is a Chinese equivalent of every Internet service that I can find in the West. In the case of Weibo, it's probably even more popular than Twitter is here. While censorship is the official reason for the blocking of these Western websites, my feeling is that protecting local Internet industry is an equally strong reason. When counterfeiting is this far entrenched inside the country, it's not surprising that Western companies find their stuff getting copied in China.
  • Inflation - First of all, China isn't experiencing hyperinflation like Iran currently or Zimbabwe from a few years ago, but prices have gone up a lot. Similar to their American counterparts, the Chinese government has been printing money like mad in the recent years and that has triggered increased income levels and massive inflation. While outsiders generally think RMB is undervalued, most Chinese people think RMB is overvalued. While the skyrocketing real estate prices have been widely reported, grocery, restaurant and consumer goods prices have also gone up a lot. Prices for good restaurants in Beijing has not yet reached New York level, but would be comparable to most other cities in America. While I was in a famous mall in Beijing, I checked out some stores (including Coach, Swarovski and Espirit) just to compare them to American prices. They were generally anywhere from 2 to 5 times to how much these things cost in America. It's not surprising that when Chinese tourists come to America, they spend mass amount of money buying brand name products here. Looking at this, it makes me wonder how the poor people in China and the migrant workers can afford to live in this kind of environment. The only things that are still relatively cheap are transportation (which is subsidized by the government) and rental cost (due in part to lack of legal protection for renters).

These are the things that really stood out to me from my visit. I know that some of my readers won't like what I say, but I can only report on what I saw and heard from people I talked to.

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