China is moving beyond exports to meeting domestic demand

Last week, China was officially acknowledged as the the world's second largest economy, moving ahead of Japan, and second only to the US. While the news was on front pages in India, there was no jubilation in China. The Times of India, had a special feature to mark the occasion. Saibal Dasgupta, the Beijing correspondant of the newspaper, looks at some of the implications and challenges, in the article "The big Bite", on Aug 22, 2010.

Any exuberance about its slotting into second place after the US was limited to those remarks in the People's Daily. Instead, a commerce ministry spokesman cautioned against any sense of glee, pointing out that China still had 40 million people below the poverty line. "China remains a developing country. The quality of China's economic development still needs to be raised. It needs more effort to improve economic quality and people's lives," Yao Jin said.

It is a valid point and the Chinese authorities' public reiteration of their domestic challenges appear to indicate their focus. Overtaking Japan in terms of gross domestic product is not going to change the basic truth:

- China is 10 times the size of Japan

- it is a rapidly ageing country and its one-child policy shows signs of becoming a liability

- the ongoing property boom has the government caught between a rock and a hard place, ie should it keep the elite happy or extend its largesse to a wide swathe of poor and lower middle class people

In addition, President Hu Jintao's drive to develop the relatively backward western and central provinces instead of focusing on the more advanced eastern and southern provinces poses a serious political problem in itself...

There are other problems too. With growing prosperity, more Chinese are learning English and with it a new philosophy — that it is man's right to be free and to have a democratic system of governance. The Communist Party is not ready to deal with this challenge...

In the second article, "Chance to be bigger than Coke in China", Sujit John & Mini Joseph Tejaswi, notes China's growing focus on domestic economy, and foreign investors are taking note.

China appears increasingly open to overseas investors willing to feed this demand. Chinese vice-commerce minister Chen Jian told the Indian delegation: "I hope you can tell Indian entrepreneurs that the Chinese government wants more and more products imported from India. I hope large enterprises from India will have a larger influence than Coca-Cola in China."

Some Indian enterprises have recognized the potential of the Chinese market and moved in aggressively. Mahindra & Mahindra has made acquisitions in China and has become one of the country's largest tractor companies. Automotive components company Sundram Fasteners' Chinese unit supplies both export and domestic markets.

Chennai-based Orchid Chemicals and Pharmaceuticals has a 50:50 joint venture with North China Pharmaceutical Corporation and is focussing on bulk manufacturing and marketing of drugs for the Chinese market. "In four years, we have clocked $50 million in revenues and more importantly, the operations were profitable from day one," says K Raghavendra Rao, CEO of Orchid Chemicals.

Rao says China can be great for Indian business. "The (borrowing) cost of funds is low. We have accessed funds at 6% per annum, which is impossible in India. Labour cost is less than half of that in India. We pay a third for power and fuel in China, when compared with that in India. And physical infrastructure is an intangible benefit for all investors."...

The Rise Of India

Excerpts from Asian Journal of Political Science, 20th August 2010 Edition:

"Compared to China Indian public policy still has a lot of room for improvements.
‘Maoists’ or Naxalites threaten political stability and economic freedom.
Geopolitics may explain India’s late, slow and incomplete reforms. The
rise of Asia, in particular of China and India, generates geopolitical challenges of its own.
Conceivably, the global expansion of economic freedom permits not only the rise of Asia,
but the peaceful management of the coming power transition between Asia and the West."

"China and India together account for almost 40 per cent of mankind. Once they joined the
capitalist market economies, capitalism became truly global.Mainland Asia is catching
up. According to Maddison (2007: 378, 381), in 1950 the Asian share of world
population was 54.7 per cent, but the Asian share of world gross domestic product
(GDP) was only 18.6 per cent. By 2003 the Asian share of global population had
increased to 59.4 per cent, but the Asian share of world GDP had more than doubled
and increased to 40.5 per cent. In 2003 the West still commanded 43 per cent of world
GDP, but contained only 12 per cent of global population (Maddison, 2007: 71)."

"From the 1950s to 1980 per capita incomes in India and China were fairly similar to
each other. Per capita incomes in both countries grew more slowly than globally
(Maddison, 1998: 40 41). Both of them pursued ‘leap-forward strategies’ which
focused on heavy industries in spite of capital scarcity and labour abundance.
Comparative advantage was neglected (Lin et al., 2003: chapter 2). It could not be
exploited until the focus on heavy industry and import-substitution was mitigated
or given up. Like China, India was afflicted with socialism and an emphasis on
planning.8 Of course, a comparative advantage defying development strategy would
have been impossible in a free and competitive market economy. A large involvement
of government makes big and persistent mistakes possible. Whereas China suffered
from the repressive and radical variety of socialism, India tried the democratic
variety. Both countries, even democratic India, more or less disengaged from the
global economy. In the late 1940s when India became independent, its share in
global exports was 2.4 per cent. In the early 1990s, it was only 0.4 per cent (Bhagwati,
1993: 58). "

"The poor performance of the world’s most populous countries was not inevitable.
In principle, both of them should have enjoyed the ‘advantages of backwardness’ and
should have benefited from ‘conditional convergence’ (Barro and Sala-i-Martin, 1995;
Helpman, 2004; Levine and Renelt, 1992; Levine and Zervos, 1993; Olson, 1996).
Although not all backward economies do converge, although not all of them exploit
the potential ‘advantages of backwardness’, in principle the followers of the global
development process enjoy some advantages over the pioneers. If they choose to do
so, they can benefit from the greater degree of economic freedom and development of
the more advanced countries (Weede, 2006). They may borrow technologies.9 They
easily find opportunities for productive investment and are less likely to run into the
problem of decreasing returns. They can reallocate labour from less productive
employment in agriculture to more productive employment in industry and, later, in
services."

China's rise in Africa: What kind of impact it would have?

China has been making inroads in to Africa at a rapid pace, over the past decade. This has triggered a debate on the qualitative differences between conventional western influence in Africa, over the past two centuries, and the implications of China's entry. James Shikwati, is an old friend of mine, and he runs IREN,one of Africa's few free market think tanks in Nairobi. Mr Shikwati has now weighed in on this debate in this article, "China's surge challenges Africa's worldview" published in the African Executive, the weekly newsletter. He says that China's surge on the world stage, might have a good impact on Africa, if only African's are ready to take advantage of this new opportunity. Another factor that explains China's appeal in African, he says, is China's apparent non-interference in domestic politics of African countries.

China’s economy now valued at $ 1.33 trillion has surpassed Japan’s $1.28 trillion to position her as the second largest economy in the world after United States of America. Of interest to Africa is the fact that China, still largely a developing country, is already a major power in global politics. Could China be building on its ancient infrastructure that has been dormant over the years?

One need not go far in search for an answer. Kenyans have been treated to startling news of Siyu village in Patte Island that has Africans of Chinese descent. The Chinese have already taken some of their “relatives” from this place for university education in their country.  Mzee Baraka Badi Shee, whose daughter Mwamka Sherriff currently studying in China, is said to be linked to some of Zheng He’s crew whose ship sunk off the coast of Kenya 600 years ago.

Recent reports by International Energy Agency based in Paris indicate that China has already surpassed U.S.A in energy consumption. China’s total energy consumption in 2009 was equivalent to 2.265 billion tones of oil compared to U.S.A’s 2.169 billion tones in the same year. China – Africa trade has surged from $55.5 billion in 2006 to $106.8 billion in 2008 largely in raw material imports from the continent.  In Kenya alone 44 Chinese companies have already invested in the country, 12 of which have joint Kenya – Chinese ventures.

China’s surge in global economic and political prowess is likely to impact on Africa’s world view and recorded history. Those who have visited the Kenyan coastal towns are treated to Arabic and Portuguese connection to East Africa. The ongoing excavations led by a team of archeologists from Peking University might turn around what schools have taught over the last century about East African history. Vasco Da Gama’s pillar that towers over Malindi coast might soon get dwarfed by that of Zheng He (1371 – 1433), who is reported to have arrived earlier than Europeans.

Historians might soon open another battlefront on China’s role in understanding the world’s geography. Already debate is ongoing on whether it was Ferdinand Magellan (1480 – 1521) who circumnavigated the earth first or the Chinese. For Africa, what is important is the point that China is not an ordinary “developing country.” China has a development infrastructure that predates some of the modern developed nations. Economists will have to grapple with China’s central command “market economy” and political scientists with its one party democracy among others. Unlike their Western counterparts that invest heavily in media-good-look drives; the Chinese move in hushed steps.

The Chinese could simply be “modernizing” their ancient power unlike Africa whose development script is largely not connected to the continent’s past. The African script is dictated by outsiders making it extremely difficult for individuals to strategize for the future.  African scholars and those in Diaspora that have attempted to connect the continent to its past for purposes of launching momentum for the future rarely get attention.

China is more appealing to Africa due to its “developing economy” status and its policy of non interference in internal politics of other countries. A little peep into Chinese history reveals just how Africa uses prejudiced scripts to judge its partners. Africans have a humongous task to seek to understand themselves, the Chinese and their traditional allies from the West. Unearthing Africa’s trade and political past; re-writing history books to help put geopolitics in perspective and pushing for the reorganization of the global market system among others are some of the steps to take. China’s surge in the global arena is good for Africa… only if Africans take advantage of the fresh air it offers.

Changing climate: Hope for the tiger?

Two crouching tigers, some hidden dragons

The winds of change between the two giants could impact not only the environment but also politics. In this article published in the special issue (July-August 2010) of the "India China Chronicle", I look at the possible implications of the cooperation between these two countries at the climate conference in Copenhagen, last year. I believe a much bigger opportunity lies in the field of wildlife conservation, particularly in saving the tiger. Following is the text of the article.

Over the past half century, relations between the two Asian giants have been on a roller coaster ride. In recent years too the two countries have seen sentiments swing wildly on issues ranging from trade to Tibet, coloured periodically by the border issue.

Despite its history of turbulence, the two neighbours together made history at the climate summit in Copenhagen in December 2009, for the first time, the world got a glimpse of the possible consequence when China and India join hands for a common cause. prior to the climate summit, there had been a flurry of high level exchange between the two sides. Both countries came up with evidence to show that carbon intensity of their economies had been falling over the past decades. Both made unilateral announcements to reduce the carbon intensity further over the next decade. They also underscored the need for equitable share of the planet's atmosphere to meet the developmental aspirations of the people, and finally, they proposed to focus on a target of temperature increase in the future, as an alternative to the carbon emission targets which had been the cornerstone of the global climate negotiations.

While much of this information was trickling out of Delhi and Beijing prior to Copenhagen, there was very little appreciation of the possible implications of all this at the UN climate summit.

That became clearer in Copenhagen, when it was acknowledged that China and India were in constant touch, developing their negotiating strategies together. Even the ministers on the two sides were meeting almost on a daily basis to ensure that issues were smoothened out.

Today, it is clear that this joint positioning was the most significant factor in the ability of developing countries to withstand the pressure mounted by the rich countries in Copenhagen. With all the hype that was built up prior to Copenhagen, hardly anyone could have believed that at an international event of this magnitude, at an European capital, would have led to the marginalization of Europe itself. It was the Americans who seem to have realised the tectonic shift that was taking place, and decided to cut the losses by striking a deal on the political statement at the end. European governments had banked on the prospect of an agreement in Copenhagen to infuse new life to the Kyoto protocol, which is to expire in 2012, and so the political statement left them quite shocked.

China has been a member of various developing country groupings, including the G-20. But hardly ever was China seen taking the lead at international negotiations. At the WTO meetings over the past decade, it was the Brazilian and Indian ministers who typically articulated the developing country perspective. Copenhagen has changed all that. It is likely that the 2009 climate summit will be remembered not so much for its failure to reach an agreement to go beyond Kyoto protocol, but for the impact that China and India, by cooperating with each other, had on the whole process.

The question that arises: Is this a new phase of India-China cooperation in Copenhagen an exception, or would that become the norm for the future? Will the climate of relationship between the two giant neighbours undergo a fundamental shift in the aftermath of the climate summit?

Needless to say the two countries have a wide range of issues confronting each other. They range from economics to environment, from the unresolved border to geo-politics. While political frictions do surface periodically, both the countries seem to have matured enough not to allow the political cloud to affect the growing trade and economic relationship.

But the wide convergence on different environmental issues facing China and India, could help the two countries to seek common grounds on these areas. Without the historic baggage that affects the political relationship, and the periodic tensions that surface in any trade relationships, the prospect of better relationship on environmental issues because of the convergence of interest seem much brighter. And the cooperation on environmental issues may help improve the level of mutual trust and confidence that could rub off positively on political relationship as well.

The two countries are already cooperating on conventional and non-conventional sources of energy. Other potential environmental areas where there could be complementary relationship are newer and greener technologies,     ship-breaking,     recycling of material, etc. But perhaps the highest political capital lies in the possibility cooperation in the area of tiger conservation.

Tiger is an iconic animal in culture and history of both China and India. There are perhaps two dozen tigers left in the wild in China, mostly along the Siberian border. India currently estimates that about 1400 tigers are roaming in the wild. But globally, tiger is a highly endangered species, and remains so despite many initiatives launched to save it over the past four decades.

India believes that the demand for tiger parts in traditional Chinese medicine is one of the major sources of threat to tigers in Indian forests. Others think that the pressure of poaching to meet demand in China constitutes a smaller threat, about 25%. The bulk of the threat to tigers in India comes from shrinking forest habitat and the consequent conflict between human and wildlife.

Tiger conservation is not primarily an issue of law enforcement. India has problem of protecting its tigers, just as China has problem in completely eliminating all trade of tiger parts.

Recently there were some indications that there is perhaps a shift from this mutual blame game. India recently recognized that protecting tigers is primarily India's responsibility, since the Chinese do not come to India to poach the tigers.

China, on the other hand, is exploring alternative conservation strategies. following its economic rise, increasing number of people are finding non-rural economic opportunities, as a result, human pressure on forest and wild areas in many parts of China have significantly reduced. In some of these parts, forests have made a dramatic comeback. Some of these old tiger habitats could be ready again to host wildlife.

China is seriously looking for ways of reintroducing tigers in a controlled manner, in a few areas where tigers once roamed. Hardly any country has as much expertise and experience of managing tiger habitats as India. With recent relocation of tigers into areas from where they had vanished, India is also grappling with similar problems.

China does not have wild tigers ready for translocation. so they have set up an ambitious effort to try to develop ways of re-wilding tigers that have been born in captivity. This is a very exciting scientific opportunity.

In both these aspects, preparation of tiger habitat, re-wilding and reintroduction of the tiger, China and India could cooperate, and if successful, it would secure not just the tiger, but generate huge amount of goodwill between the elephant and the dragon!

China poses an even more audacious challenge to old conservation mindset. It has almost perfected the art of breeding tigers in captivity. It has more than 5000 tigers in captivity in zoos and other facilities. It could initiate a controlled trade in tiger parts from its captive tigers, and that could lower the incentive to poachers to kill wild tigers.

Even if India does not wish to join in this effort to help the cause of conservation through commerce, it stands to gain if China is successful in meeting the demand for tiger parts from its stock of captive tigers.

From the history of world trade, it is clear that smugglers and criminals profit only when there is a restriction on trade, creating an unmet demand for goods and services. Naturally, when trade is outlawed, only outlaws trade! If China were to legalize trade in tiger parts from its breeding facilities, the poachers in India would have little chance of competing with the market forces. Consequently, threat of poaching will almost get eliminated in India. There are many examples from across the world where legal trade has eliminated illegal trade. Over a million crocodiles are harvested each year from farms, yet there is hardly any evidence of any crocodile being killed in India in order to meet the demand from the international fashion industry.

China and India need to find ways of building on the new climate they sought to create in Copenhagen. Their common position on climate was premised on the belief that economic growth would actually enable the countries to improve energy efficiency, reduce pollution, compete effectively and clean up the environment. And as economies improve, they de-carbonise, as the history of human development illustrates over the past 400 years.

This is the real potential of the changing climate between China and India - harnessing the power of commerce, benefiting people and improving the quality of environment. Today, economic potential of both China and India are now openly acknowledged by all. Now is the time to reap the environmental dividend from economic development

Success despite govt, courtesy jugaad

When an overwhelming majority of Chinese businessmen say that the main reason for their success is network connections (guangxi), especially with government officials, most Indian businessmen attribute their success to Jugaad, ability to get around prohibitive laws.Most Indian businessmen see corruption a problem when the Chinese success story is mainly Government led. China has been less resilient in dealing with the economic crisis and is likely to end up with a weaker workforce, writes Swaminathan Aiyar in Economic Times.

Read the whole article:

"No less than 93% of Chinese businessmen say the main reason for their spectacular success is network connections (guangxi), especially with government officials. Indian businessmen, however, have succeeded despite the government: 81% say the main reason for their success is jugaad, the ability to find innovative way round prohibitive rules and institutions."

"This is the key finding of a survey of 4,000 businessmen in the two countries by YouGov, a top online survey organisation, and the Legatum Institute, an independent think tank. "

"Most Indian business owners view the government as corrupt, wasteful and ineffective. They acknowledge major gains from liberalisation but see corruption as a terrible problem that merits top priority in the future."

"India's main successes are in the private sector, while its main failures are in the government sector. That is surely a major reason why India has lagged behind China for three decades. It may yet overtake China in the next decade because of its demographic dividend. In 2011-20, India's workforce will increase by 110 million, but China's by less than 20 million, according to a Goldman Sachs study. This advantage may translate into faster GDP growth."

"One-fifth in India and just over onethird in China believe the global financial crisis has made starting and running a business more difficult."

"This suggests that China has been less resilient than India in facing the financial crisis. This probably flows from China's greater dependence on exports."

"But the confidence now exuded by Indian and Chinese entrepreneurs shows that feelings of inferiority induced by the colonial era are almost entirely gone."

"Chinese entrepreneurs say the main reason for starting businesses is to make money. Indians give money a lower priority, and say their main motivation is independence, being one's own boss."

"Only a small fraction - 6% in China and 2% in India - sees philanthropy or volunteerism as the primary means for creating social impact. "

Inside the minds of Indian and Chinese entrepreneurs

There is no dearth of commentary on economic comparison of India and China. A new study by the Legatum Institute says that Entrepreneurs in both the country are bullish about the economy. When most entrepreneurs in India start on their own, for being their own boss, Chinese entrepreneurs do it for money. Many Chinese owe their entrepreneurial spirit to the state, when such is not the case in India. Chinese entrepreneurs are more dependent on banks, when Indian are dependent on family resources, writes Ryan Streeter in The Wall Street Journal.

Excerpts:

"The past few years have seen no shortage of commentary about the comparative economic environments in China and India, where growth and the rise of enterprising classes have gone hand in hand. Yet we have very little data to help us understand how entrepreneurs in these countries think and what motivates their decisions and actions. A new survey of more than 4,000 entrepreneurs, business managers and aspiring entrepreneurs, conducted by YouGov and released today by the Legatum Institute, sheds light on the countries' respective enterprising classes—and raises some questions for policy makers and investors."

"Entrepreneurs in both countries share a high degree of bullishness. "

"Looking beyond the economic optimism, however, two different styles of entrepreneurship emerge. The differences start with why entrepreneurs launch businesses in the first place. Asked about their main motivation, the overwhelming majority of Indian entrepreneurs name "being my own boss," while the most popular response in China is earning more money. In this way, Indian entrepreneurs more closely resemble the Western model: American entrepreneurs were more likely to cite "owning my own company" than "building my wealth" as the main reason they launched a business, according to a Kauffman Foundation study last year."

"When asked about other factors inspiring their decision to start businesses, nearly half of Chinese entrepreneurs give answers related to the state's efforts to promote and manage enterprise. Compared to just 9% in India, 23% of Chinese entrepreneurs say what they learned in school or at the university prompted their decision, presumably a result of the government's strategy of using universities to promote entrepreneurship. Chinese business owners cite pro-business actions by the government or pro-business messages in the media (which in China are state-controlled) at three times the rate of their Indian peers."

"This difference in inspiration and motivation manifests itself in many ways. The relational Indian model of business start-ups is evident in enterprise financing, where 49% of business owners rely on family resources to start their enterprise, compared to only 25% in China. Chinese entrepreneurs are much more dependent on banks, with 49% taking out loans compared to 27% in India. Indian entrepreneurs use conventional financing through debt and investors at about half the rate of their Chinese peers. "

"In listing factors important for starting a business, Indian entrepreneurs place nearly as much value on internal personal qualities, such as creativity and the ability to take risks in the face of adversity, as they do access to finance. Access to information and knowledge, for instance, is more important to Chinese entrepreneurs than being creative. This suggests that Chinese entrepreneurs believe business success depends on external market conditions that can be known and manipulated, whereas Indian entrepreneurs regard success as the result of their internal ability to adapt to changing conditions."

"The survey results uncover an unfolding experiment on how best to foster business creation in developing countries. So far, our findings suggest entrepreneurship in India is marked by a kind of sustainability that is less evident in China. Because India's entrepreneurs have succeeded amid dysfunctional government and financial institutions by developing a kind of independent and experimental ingenuity, it stands to reason that the enterprising class would prosper even more were India to reduce barriers to business and clean up corruption. In China it is unclear what will happen if state efforts are no longer sufficient to entice and groom the entrepreneurs its economy needs. "

Looking at the China India relations through the lens of the media

One issue which the media likes to focus on, quite periodically, is the Sino-India border problem, and it is true that the border issue has been simmering for a long time. But there is much more to the relationship between these two Asian neighbours, much beyond borders. Pallavi Aiyar, who spent six years in China as a journalist, speaks to Nitin Pai on how the media is shaped in the two countries, and how the media might impact the relationship between the two neighbours. The conversation also looks at the significance of soft power, and the fueling of nationalist sentiments. Pallavi Aiyar is the author of ‘Smoke and Mirrors: An Experience of China’. Ms Aiyar is based in Brussels, and is the correspondent for the Business Standard newspaper in India.

Here are a few excerpts from the interview, “A lot more than a border”, is published in Pragati magazine, in its August 2010 issue.

Nitin Pai: There used to be—and there is to some extent—a perception in India that what comes out in the Chinese media is the view of the Chinese government. Certainly Mao Zedong was known to have vetted the editorials in the People’s Daily during the India-China tensions in the late 1950s and 60s. To what extent is such a perception still valid?

Pallavi Aiyar: The Chinese media landscape is an increasingly complex one and a far cry from Maoist times. A multiplicity of media operate today ranging from fully controlled party papers like the People’s Daily, to more independent and critical regional media like Nanfang Zhoumo (Southern Weekend) in Guangzhou, and racy, tabloid papers that operate as purely commercial enterprises. There are also a variety of specialist publications focused on finance, business or the environment that increasingly attempt an independent line and push the envelope against government censorship.
That said, foreign affairs and China’s international relations remains a subject that is strongly controlled by the government and independent writings on the topic are forbidden. Even today central and regional propaganda departments send weekly (and sometimes daily) instructions to all media outlets about subjects deemed taboo. Editors who transgress orders are, depending on the assessed severity of the violation, warned, demoted or fired.
Writings on India in the Chinese media therefore almost always have official sanction even if they do not always reflect the government’s official position. This is equally true of Party media and so called independent media like the Global Times (which is in fact controlled by the People’s Daily group).
Since the Party is not a monolith, differing opinions on India in the Chinese media reflect the differing shades of opinion within the Chinese government. However, although it is often claimed otherwise by the Chinese, they do not simply reflect the opinion of the author.
The internet and blogs are an altogether different kettle of fish. These are not routinely subject to propaganda department orders. If a blog is discovered to be overly transgressive the government is able to either shut it down or have the “offending” material deleted. However, there can be considerable gaps in time before the publication of an unauthorised article and its discovery. Moreover, the writings on a blog are more likely to reflect the personal opinion of the writer rather than that of the government or a faction of the government.

Nitin Pai: How about the other way around: how much do views expressed in the Indian media (by mediapersons and analysts) affect Chinese perceptions of Indian government policy?

Pallavi Aiyar: The Chinese monitor Indian media carefully and the coverage of Sino-Indian developments is seen as a key indicator of the strategic “pulse” in India. There is an awareness that media in India can often take a standpoint that is different or even contrary to the government line. On the other hand there is also the belief that media do not invent stories out of thin air and that they are usually based on leaks from within the government or military establishments. There is less understanding of the extent to which media in India, particularly television, is driven by the competition for ratings and the tendency towards sensationalism this generates. The idea that the media can create out of what might originally have been a “genuine” story, a run-away monster over which the authorities have little control, is not something the Chinese have an automatic grasp of. The danger of a misreading of Indian media is therefore a significant one and can create a backlash at the policy level.
The Chinese are also aware of the difference between news coverage per se and the comments and analysis that are usually written by strategic pundits. The latter are taken particularly seriously since it is known that the writers are often also strategic advisors to the government.

You may like to read the full interview here. “A lot more than a border”, is published in Pragati magazine, August 2010.