Posts tagged ‘China’


The elephants fight back | The Economist

FOR anybody who fears that China’s interest in elephants’ tusks could spell doom for the great beasts, there have been two pieces of good news.

On September 25th Xi Jinping, the Chinese president, joined Barack Obama in pledging “significant and timely steps” to halt commercial trade in ivory. Then on October 15th China announced a one-year ban on the import of ivory hunting trophies from Africa, closing a big loophole. Wildlife activists are delighted. These moves should have “a profound effect” on elephant numbers, says Peter Knights of WildAid, a charity.

The world’s elephant population has dived from 1.2m in 1980 to under 500,000 today. In 1989 the sale of ivory was banned worldwide. But in 1999 and again in 2008, the Convention on International Trade in Endangered Species (CITES), a conservation pact, allowed the sale of stockpiles of ivory from southern Africa to China. The countries vowed to use the proceeds for conservation; China claimed it had a robust registration system that would keep illegal ivory out. But conservationists rightly predicted the concession would fuel more smuggling and so more killing.

Permitted sales became a cover for illegal ones. In 2010-12 about 100,000 elephants were slain for their tusks. In the past five years, Mozambique and Tanzania have lost half their elephants to poaching.

This dire trend reflects China’s deeper engagement with Africa, combined with corruption and the presence of criminal gangs. But it seems that Chinese leaders have seen the trade’s effects on their reputation, says Dominic Dyer of the Born Free Foundation, a charity. They should now close the legal carving workshops and ban the domestic trade, too, he adds.

Despite strong demand for ivory among China’s rising middle class, attitudes may gradually be changing. As of 2012, nearly half of Chinese people saw elephant poaching as a problem, according to a survey by WildAid. The figure has been boosted by the support of celebrities. Yao Ming, a basketball player, and Jackie Chan, an actor, appear on posters everywhere with the message: “When the buying stops, the killing can too.” The government has donated $200m worth of media space every year since 2008.

Opinion on ivory has shifted fast, says Mr Knights, partly because of the success of another campaign, to protect sharks. In the markets of Guangzhou, the global centre for the trade, dried shark fins have fallen from 3,000 yuan ($470) per kilo five years ago to 1,000 yuan today, as Chinese people abjure shark-fin soup, a delicacy.

WildAid raised its voice over that issue, too, but more important was the Communist Party’s ban in 2013 of shark-fin soup at official banquets, part of a drive against corruption and excess. The Hong Kong government followed, as did airlines and hotels. A survey in 2013 found 85% of people said they had stopped eating shark-fin soup in the past three years.

One scourge is untouched by all this: the illegal trade in rhinoceros horn. More than 1,200 rhinos were killed for their horns in 2014 in South Africa alone, up from just 13 killed in 2007. This partly reflects a huge rise in demand in Vietnam, but China is also a consumer. Ground rhino horn is believed to cure fever and improve sexual performance. One kilo can cost up to $70,000.

Ominously, some African nations now want a one-off sale of rhino-horn stocks, as happened twice with ivory. To secure this, South Africa must win two-thirds of the member states at the next CITES conference, which it hosts next year. Mr Dyer hopes other countries, including China, will dissuade the Africans. “We are in exactly the same place we were with ivory nearly ten years ago,” he frets.

Source: The elephants fight back | The Economist


The north star | The Economist

ASKED what they think of Lu Hao, their governor, residents of Harbin, capital of the north-eastern province of Heilongjiang, often reply with the word xiaozi. This roughly translates as “young whippersnapper”.

Mr Lu’s youthfulness is indeed striking. Born in 1967, he is the youngest of China’s current provincial governors. He was also the youngest to hold most of his previous positions. Those include factory boss at a large state-owned enterprise, deputy mayor of Beijing and leader of the Communist Youth League, an important training ground for many a national leader.

China’s system of political succession produces occasional surprises, such as the purge three years ago of another provincial leader, Bo Xilai, on the eve of what appeared to be his likely elevation to the pinnacle of power, the Politburo Standing Committee, alongside Xi Jinping, who is now president. But at least since the Communist Party began institutionalising succession arrangements in the 1990s, high-flyers have often been easy to spot. Mr Lu is one of them.

His stint at the youth league was of greatest portent. The organisation is something like an American fraternity club (without the misbehaviour)—its members form close ties which are often maintained in their later careers. Its leaders have a tendency to move into high national office. Hu Yaobang, a party chief in the 1980s, grew to prominence in the league, as did Hu Jintao, Mr Xi’s predecessor. Li Keqiang, the current prime minister, is also an ex-head of the league. Mr Lu’s stint in that role from 2008-13 made him an obvious rising star. His subsequent promotion to a provincial governorship confirmed this impression.

Youth is on his side. The next rung on the ladder to the top may be induction into the 25-member Politburo, possibly as early as 2017. But it will not be until around the time of the party’s 20th congress in 2022—a year after its 100th birthday—that Mr Xi will retire and Mr Lu will have a chance to shine, likely as one of the (now seven) members of the Standing Committee. He will then be 55, a year older than Mr Xi was when he joined the body in 2007. That would give Mr Lu a good few years at the top: Standing Committee members are expected to retire around 70. He would be a member of what party officials already call the “sixth generation” of Communist leaders (the first having been led by Mao Zedong, Mr Xi representing the fifth).

There are several other likely members of the upcoming generation. They include Hu Chunhua, Mr Lu’s predecessor as head of the youth league who is now the party boss of the southern province of Guangdong; and Sun Zhengcai, the party chief of Chongqing, a south-western region. One rising star has already fallen, however. Su Shulin was thought to have bright prospects until he was removed as governor of coastal Fujian province after being snared in a corruption investigation in October.

China’s media often drop hints of who to watch. Mr Lu’s appointment as Heilongjiang’s governor (a few months after he became the youngest full member of the party’s 370-strong Central Committee) was accompanied by a flurry of celebratory articles in the party’s main mouthpiece, the People’s Daily, and other newspapers. They emphasised Mr Lu’s youth, impeccable work ethic and solid record of excellent performance in his previous jobs.

Source: The north star | The Economist


Five myths about the Chinese economy – McKinsey Quarterly

A widely held Western view of China is that its stunning economic success contains the seeds of imminent collapse. This is a kind of anchoring bias,1 which colors academic and think-tank views of the country, as well as stories in the media. In this analysis, China appears to have an economy unlike others—the normal rules of development haven’t been followed, and behavior is irrational at best, criminal at worst.

There’s no question, of course, that China’s slowdown is both real and important for the global economy. But news events like this year’s stock-market plunge and the yuan’s devaluation versus the dollar reinforce the refrain, among a chorus of China watchers, that the country’s long flirtation with disaster has finally ended, as predicted, in tears. Meanwhile, Chinese officials, worried about political blowback, are said to ignore advice from outside experts on heading off further turmoil and to be paranoid about criticism.

My experience working and living in China for the past three decades suggests that this one-dimensional view is far from reality. Doubts about China’s future regularly ebb and flow. In what follows, I challenge five common assumptions.

  1. China has been faking it

A key tenet of the China-meltdown thesis is that the country has simply not established the basis for a sustainable economy. It is said to lack a competitive, dynamic private-enterprise structure and to have captured most of the value possible from cheap labor and heavy foreign investment already.

Clearly, China lacks some elements of a modern market economy—for example, the legal system falls short of the support for property rights in advanced countries.2 Nonetheless, as China-economy scholar Nicholas Lardy recently pointed out, the private sector is vibrant and tracing an upward trend line. The share of state-owned enterprises in industrial output continues to drop steadily, from 78 percent in 1978 to 26 percent in 2011.3 Private industry far outstrips the value added in the state sector, and lending to private players is growing rapidly.

In fact, much of China’s development model mirrors that of other industrializing and urbanizing economies in Asia and elsewhere. The high savings rate, initial investments in heavy industries and manufacturing, and efforts to guide and stabilize a rapidly industrializing and urbanizing economy, for example, resemble the policies that Japan, South Korea, and Taiwan followed at a similar stage of their development. This investment-led model can lead to its own problems, as Japan’s experience over the past 20 years indicates. Still, a willingness to intervene pragmatically in the market doesn’t imply backwardness or economic management that’s heedless of its impact on neighboring economies and global partners.

Furthermore, China’s reform initiatives4 since 2013 are direct responses to the structural changes in the economy. The new policies aim to spur higher-value exports, to target vibrant emerging markets, to open many sectors for private investors, and to promote consumption-led growth rooted in rising middle-class incomes. Today, consumption continues to go up faster than GDP, and investors have recently piled into sectors from water treatment to e-commerce. These reforms are continuing at the same time China is stepping up its anticorruption drive, and the government hasn’t resorted to massive investment spending (as it did in 2008). That shows just how important the reforms are.

  1. China’s economy lacks the capacity to innovate

Think tanks, academics, and journalists alike maintain that China has, at best, a weak capacity to innovate—the lifeblood of a modern economy. They usually argue as well that the educational system stomps out creativity.

My work with multinationals keen on partnering with innovative Chinese companies suggests that there’s no shortage of local players with a strong creative streak. A recent McKinsey Global Institute (MGI) study describes areas where innovation is flourishing here.5 Process innovations are propelling competitive advantage and growth for many manufacturers. Innovation is at the heart of the success of companies in sectors adapting to fast-changing consumer needs, so digital leaders like Alibaba (e-commerce) and Xiaomi (smartphones) are emerging as top global contenders. Heavy investment in R&D—China ranks number two globally in overall spending—and over a million science and engineering graduates a year are helping to establish important beachheads in science- and engineering-based innovation. (See “Gauging the strength of Chinese innovation.”)

  1. China’s environmental degradation is at the point of no return

To believe this, you need to think that the Chinese are content with a dirty environment and lack the financial muscle to clean things up. OK, they got things wrong in the first place, but so did most countries moving from an agrarian to an industrial economy.

In fact, a lot that’s good is happening. Start with social activism. A documentary on China’s serious air-pollution problems (Under the Dome), by Chai Jing—a former journalist at China Central Television (CCTV), the most important state-owned broadcaster—was viewed over 150 million times in the three days after it was posted online, in March 2015. True, the 140-minute video, which sharply criticizes regulators, state-owned energy companies, and steel and coal producers, was ultimately removed. But the People’s Daily interviewed Chai Jing, and she was praised by a top environmental minister.

China is spending heavily on abatement efforts, as well. The nation’s Airborne Pollution Prevention and Control Action Plan, mandating reductions in coal use and emissions, has earmarked an estimated $277 billion to target regions with the heaviest pollution.6That’s just one of several policy efforts to limit coal’s dominance in the economy and to encourage cleaner energy supplies. My interactions with leaders of Chinese cities have shown me that many of them incorporate strict environmental targets into their economic master plans.

  1. Unproductive investment and rising debt fuels China’s rapid growth

To believe this, you would have to think, as many skeptics do, that the Chinese economy is fundamentally driven by overbuilding—too many roads, bridges, and buildings.7 In fact, as one economist has noted, this is a misperception created by the fact that the country is just very big. An eye-popping statistic is illustrative: in 2013, China consumed 25 times more cement than the US economy did, on average, from 1985 to 2010. But adjusted for per-capita consumption and global construction patterns, China’s use is pretty much in line with that of South Korea and Taiwan during their economic booms.8

China’s rising debt, of course, continues to raise alarms. In fact, rather than deleveraging since the onset of the financial crisis, China has seen its total debt quadruple, to $28.2 trillion last year, a recent MGI study found.9 Nearly half of the debt is directly or indirectly related to real estate (prices have risen by 60 percent since 2008). Local governments too have borrowed heavily in their rush to finance major infrastructure projects.

While the borrowing does border on recklessness, China’s government has plenty of financial capacity to weather a crisis. According to MGI research, state debt hovers at only 55 percent of GDP, substantially lower than it is in much of the West. A recent analysis of China’s financial sector shows that even in the worst case—if credit write-offs reached unprecedented levels—only a fairly narrow segment of Chinese financial institutions would endure severe damage. And while growth would surely slow, in all likelihood the overall economy wouldn’t seize up.10

Finally, the stock-market slide is less significant than the recent global hysteria suggests. The government holds 60 percent of the market cap of Chinese companies. Moreover, the stock market represents only a small portion of their capital funding. And remember, it went up by 150 percent before coming down by 40.

Rumors drive the volatility on China’s stock exchange, often in anticipation of trading by state entities. The upshot is that the direct impact on the real economy will most likely be some reduction in consumer demand from people who have lost money trading in shares.

  1. Social inequities and disenfranchised people threaten stability

On this one, I agree with the bears, but it’s not just China that must worry about this problem. While economic growth has benefited the vast majority of the population, the gap between the countryside and the cities is increasing as urban wealth accelerates. There’s also a widening breach within urban areas—the rich are growing richer.11

Urban inequality and a lack of access to education and healthcare are not problems unique to China. People here and in the West may find fruitful opportunities to exchange ideas because the pattern across Western economies is similar. Leaders of the central government have suggested policies to improve income distribution and to create a fair and sustainable social-security system, though implementation remains a matter for localities and varies greatly among them.

In short, China’s growth is slower, but weighing the evidence I have seen, the sky isn’t falling. Adjustment and reform are the hallmarks of a stable and responsive economy—particularly in volatile times.



Oppose Taiwan independence, China’s Xi says at historic meeting | Reuters

China and Taiwan must not let proponents of Taiwan’s independence split them, China’s President Xi Jinping told Taiwan’s president on Saturday at the first meeting between leaders of the two sides since China’s civil war ended in 1949.

Ma Ying-jeou, president of self-ruled, democratic Taiwan, where anti-Beijing sentiment has been rising ahead of elections, called for mutual respect for each other’s systems and said Taiwan people were concerned about mainland missiles pointing their way.

The talks, at a luxury hotel in the neutral venue of Singapore, lasted less than an hour but were heavy with symbolism.

The two leaders shook hands and smiled in front of a mass of journalists when they met, with Xi wearing a red tie, the color of the Communist Party, and Ma a blue one, the color of his Nationalist Party.

Moving into a meeting room, Xi, speaking first and sitting opposite Ma, said Chinese people on the two sides of the Taiwan Strait had the ability and wisdom to solve their own problems.

“No force can pull us apart because we are brothers who are still connected by our flesh even if our bones are broken, we are a family in which blood is thicker than water,” Xi said.

In response, Ma said he was determined to promote peace across the Taiwan Strait and that relations should be based on sincerity, wisdom and patience.

Ma also asked Xi indirectly to respect Taiwan’s democracy.

“Both sides should respect each other’s values and way of life to ensure mutual benefit and a win-win situation across the straits,” he said.

China’s Nationalists, also known as the Kuomintang (KMT), retreated to Taiwan after losing the civil war to the Communists, who are still in charge in Beijing.

The mainland has never renounced the use of force to bring what it considers a breakaway province under its control.

Speaking to reporters after the talks, Ma said he hoped Xi could pay attention to China’s missile deployment – the island has long fretted about batteries pointed its way – to which Xi replied that was not an issue about Taiwan, he said.

“I at least raised the issue, and told him that the Taiwanese people have questions and concerns about it, and hope he will treat it with importance,” Ma said.

Zhang Zhijun, the head of China’s Taiwan Affairs Office, said Xi told Ma that the biggest threat to the peaceful development of relations was pro-independence forces. “The compatriots on both sides should unite and firmly oppose it,” Zhang said.

Source: Oppose Taiwan independence, China’s Xi says at historic meeting | Reuters


China-Taiwan Summit a Success for Singapore – China Real Time Report – WSJ

The choice of Singapore as the venue for Saturday’s historic meeting between the Chinese and Taiwanese presidents is a diplomatic coup for the famously neutral city-state.

The meeting is the first between China’s President Xi Jinping and Taiwan’s President Ma Ying-jeou, and the first time leaders from both sides have met since Taiwan and China split in 1949.

The decision to hold the summit in Singapore shows it maintains its reputation as a rare neutral ground in a region where tensions are rising, even after the death in March of the city-state’s widely-respected former leader, Lee Kuan Yew.

Mr. Ma said this week the summit is the product of years of diplomacy between the two sides, and that Singapore was chosen for its impartiality.

Singapore’s selection as host “further highlights Singapore’s role in international politics,” said Huang Jing, professor of U.S.-China relations and director of the Centre on Asia and Globalisation at the National University of Singapore. The meeting “gives Singapore a status that no other country except Singapore can match up to,” he said, adding that the city-state’s relations with both sides will likely improve as a result.

Mr. Lee, Singapore’s first and longest-serving prime minister, earned the admiration of many national leaders, such as Britain’s Margaret Thatcher and Ronald Reagan in the U.S., during his 31-year tenure in the top job. Many foreign leaders, including U.S. President Barack Obama, sought meetings with Mr. Lee to discuss international relations, both before and after he stepped down.

His son, Lee Hsien Loong, now heads a government that is keen to maintain Singapore’s regional relations. The younger Mr. Lee, although viewed as a competent and respected leader, has not inherited his father’s reputation for straight-talking, no-nonsense politics, and doesn’t yet have the leadership experience that drew his predecessor favor with other politicians in Asia.

Still, the younger Mr. Lee has worked to maintain diplomatic and economic relations with Singapore’s neighbors, sharing his father’s view that a small, multi-ethnic island surrounded by much larger countries is best served by fostering strong relationships, rather than by taking sides. It’s a position that is rare in a region brimming with diplomatic tension, as shown by current disputes such as the conflicting territorial claims in the South China Sea.

Singapore, which Chinese ethnic majority and large Indian and Malay populations, is frequently chosen as a diplomatic hub, hosting Asia-Pacific Economic Cooperation meetings and other summits. It is also the annual venue for the Shangri-La Dialogue, a high-profile international security conference.

The Shangri-La Hotel, close to the city’s central shopping district, was the venue of choice for Saturday’s meeting between Messrs. Xi and Ma. The National University of Singapore’s Mr. Huang said that allowed the Singapore government to maintain its policy on China-Taiwan relations by avoiding hosting the meeting in a government facility.

The city-state maintains a “one-China” policy on cross-strait issues, officially recognizing only Beijing as China’s capital. Lee Kuan Yew broke Singapore’s relations with Taiwan in 1990 to open them with China, although relations with both sides today are close. He also helped ease decades of tension between the two nations. In 1993, shortly after Mr. Lee stepped down from his post as prime minister to take an advisory role, Singapore hosted the first talks between representatives of China and Taiwan since the two sides clashed.

Source: China-Taiwan Summit a Success for Singapore – China Real Time Report – WSJ


Are Chinese ‘Too Rational’ for a Second Child? Interview With Mei Fong – China Real Time Report – WSJ

China’s announcement last week that it will let all couples have two children ended one of the most contentious birth restrictions in history–the one-child policy.

Implemented in 1980 to rein in explosive population growth during the Mao Zedong era, the one-child policy and its enforcement had myriad consequences, including forced abortions and sterilization. It placed the burden of elderly care on single children and fueled a gender imbalance. Some researchers also say a new generation of only children – or “little emperors” — are more pessimistic and less competitive than older generations with siblings. Now, the Chinese government is shifting course to offset the effects of a rapidly aging population and to avert labor shortages.

China Real Time spoke to Mei Fong, author of the book “One Child: The Past and Future of China’s Most Radical Experiment” and a former Wall Street Journal reporter, about the one-child policy and the unwinding of it. The book will be published in hardcover in January, but a digital edition was released Tuesday, Nov. 3. Below are edited excerpts of the interview: Mei Fong

Many couples say that despite changes in the policy, they will not have two children. What can the government do to promote births?

There was a recent Internet survey [on Chinese website Sina of 180,000 respondents who were asked if they wanted a second child] saying that 43% of people don’t want children. But there’s a difference of what people say and what they will do. A lot of people ideally want to have two so that they can have both a boy and a girl. The problem is that the one-child policy wasn’t the sole reason people weren’t and aren’t having children. For urban residents, the idea of having just one has been ingrained in them. It’s a social and economic decision and it would take a major mind shift to think of anything else.

People consider it almost it irresponsible to divert resources from any child.

One of the things that demographer Cai Yong said that has always stuck in my mind is that people are too rational for the business of having children.

Who are the likely candidates to have more children?

It’s the rich ones who will add a child. Wealthy people have been traveling to the U.S. for fertility services and U.S. passports , though it’s unclear how many. I know of one couple in Shanghai who had three children by going to the U.S. Houghton Mifflin Harcourt

But it’s hard to make generalities about China. It’s a big place and we all know someone who has had a second child or third child.

Will that mean that a two-child policy will create a bigger upper class? And what will be the consequence? One of the things that the one-child policy has created already is an inequality gap. The spectrum hit the middle class, because the people above the middle class can afford to pay for it, while the ones below were often exempt. The one-child policy is adding to the class-struggle issues. It’s the rich people who have and will have bigger families. They’re the ones that can afford fertility treatment, because fertility is a major problem. They could always afford to pay the penalties [for having more than one child].

Several years ago, there was a study that said China’s single children, its little emperors,  were less competitive and less empathetic than those with siblings. Do you see that changing? I have some doubts about that because there have been many different studies on this. But certainly, they do seem to give themselves more pessimistic labeling, like diao si [roughly translated as loser], than others.

Source: Are Chinese ‘Too Rational’ for a Second Child? Interview With Mei Fong – China Real Time Report – WSJ


Prepare for Takeoff: China Rolls Out First Large Passenger Jet – China Real Time Report – WSJ

China’s first large passenger jet rolled off the assembly line on Monday after years of delays, bringing Beijing’s dream of developing a rival to Boeing Co. and Airbus Group SE closer to reality.

As WSJ’s Chun Han Wong reports: Still, the single-aisle C919 airliner won’t be delivered to airlines for at least another three years, highlighting the difficulties

China has faced in becoming a global player in aviation. Developed by the state-run Commercial Aircraft Corp. of China Ltd. (Comac), the twin-engine jet was initially set for its first flight in 2014, ahead of commercial deliveries starting in 2016. Production setbacks forced Comac to extend its deadlines repeatedly. Company executives say flight testing should start next year, with deliveries expected in 2018 or 2019 at the earliest.

Thousands of guests, including government officials and aerospace executives, witnessed the C919’s rollout at an assembly plant near Shanghai’s Pudong International Airport, according to Chinese state media.

Source: Prepare for Takeoff: China Rolls Out First Large Passenger Jet – China Real Time Report – WSJ


What Will the Two-Child Policy Mean for China’s Property Market? – China Real Time Report – WSJ

China’s latest move to scrap its one-child policy buoyed property developer stocks Friday on hopes it could provide a boost to housing demand.

All Chinese couples will be allowed to have two children, Chinese official media said Thursday, after a meeting of top officials. While a timetable hasn’t been established, there are prospects that an increase in the size of Chinese households could raise demand for larger homes.

Shanghai housewife Tracy Li said she and her husband will be looking for a larger home once their two sons, one aged four and one who is almost a year, get older. They currently live in a two-bedroom apartment in Shanghai’s Minhang district. Like many Chinese parents, she doesn’t think it’s necessary for each child to have their own room but want to be able to accommodate grandparents, who in China are frequently deeply involved in childcare.

“When the children are older, it’s not too good for them to share a bedroom with their grandparents when they come over,” said the 34-year-old Ms. Li, who asked to be referred to by her English, rather than her Chinese, name. Finding a home in a good school district will take some time, said Ms. Li, who wants to move before her oldest son reaches school age.

Source: What Will the Two-Child Policy Mean for China’s Property Market? – China Real Time Report – WSJ


Gauging the strength of Chinese innovation | McKinsey & Company

The events of 2015 have shown that China is passing through a challenging transition: the labor-force expansion and surging investment that propelled three decades of growth are now weakening.

Gauging the strength of Chinese innovation

This is a natural stage in the country’s economic development. Yet it raises questions such as how drastically the expansion of GDP will slow down and whether the country can tap new sources of growth.

New research1 by the McKinsey Global Institute (MGI) suggests that to realize consensus growth forecasts—5.5 to 6.5 percent a year—during the coming decade, China must generate two to three percentage points of annual GDP growth through innovation, broadly defined. If it does, innovation could contribute much of the $3 trillion to $5 trillion a year to GDP by 2025.2 China will have evolved from an “innovation sponge,” absorbing and adapting existing technology and knowledge from around the world, into a global innovation leader. Our analysis suggests that this transformation is possible, though far from inevitable.

To date, when we have evaluated how well Chinese companies commercialize new ideas and use them to raise market share and profits and to compete around the world, the picture has been decidedly mixed. China has become a strong innovator in areas such as consumer electronics and construction equipment. Yet in others—creating new drugs or designing automobile engines, for example—the country still isn’t globally competitive. That’s true even though every year it spends more than $200 billion on research (second only to the United States), turns out close to 30,000 PhDs in science and engineering, and leads the world in patent applications (more than 820,000 in 2013). Video   McKinsey director Kevin Sneader discusses global innovation trends at a recent World Economic Forum event.

When we look ahead, though, we see broad swaths of opportunity. Our analysis suggests that by 2025, such new innovation opportunities could contribute $1.0 trillion to $2.2 trillion a year to the Chinese economy—or equivalent to up to 24 percent of total GDP growth. To achieve this goal, China must continue to transform the manufacturing sector, particularly through digitization, and the service sector, through rising connectivity and Internet enablement. Additional productivity gains would come from progress in science- and engineering-based innovation and improvements in the operations of companies as they adopt modern business methods.

To develop a clearer view of this potential, we identified four innovation archetypes: customer focused, efficiency driven, engineering based, and science based. We then compared the actual global revenues of individual industries with what we would expect them to generate given China’s share of global GDP (12 percent in 2013). As the exhibit shows, Chinese companies that rely on customer-focused and efficiency-driven innovation—in industries such as household appliances, Internet software and services, solar panels, and construction machinery—perform relatively well. Exhibit Enlarge However, Chinese companies are not yet global leaders in any of the science-based industries (such as branded pharmaceuticals) that we analyzed. In engineering-based industries, the results are inconsistent: China excels in high-speed trains but gets less than its GDP-based share from auto manufacturing. In this article, we’ll describe the state of play and the outlook in these four categories, starting with the two outperformers.

Source: Gauging the strength of Chinese innovation | McKinsey & Company


China Pessimism Is Overblown, IMF Says, Citing Booming Services Sector – China Real Time Report – WSJ

Recent Chinese economic data is stoking fear the world’s second largest economy is decelerating at pace that could pull the global economy into a recession. But the International Monetary Fund’s top Asia economist, Changyong Rhee, says such pessimism may be unwarranted.

A booming services sector—such as shipping and retail—is offsetting the collapse in manufacturing, he argues. Advertisement “We don’t think there’s enough evidence based on the manufacturing sector that there will be a hard landing,” Mr. Rhee said in an interview. “They definitely have a manufacturing slowdown, an overcapacity problem. But other parts of China are actually growing faster.” If Beijing relies too much on monetary policy to stimulate growth, it could fuel China’s economic problems rather than fix them, the IMF official cautioned. His warning came as the People’s Bank of China on Friday cut interest rates again in a bid to revive growth.

Old ways of measuring China’s economy—such as looking at electricity consumption—are outdated because they don’t accurately reflect the changing nature of growth, Mr. Rhee said. Services now account for more than 50% of the country’s economy and there is a good chance their contributions are being underestimated, he said. On first glance, China’s trade data appears to support worries about the economy. But digging a little deeper into the numbers may actually show the country’s move towards a growth model more reliant on consumer demand is already bearing fruit.

Although the value of imports has fallen, volumes tell a different story. By adjusting for the fall in commodity prices and the appreciation in the yuan, the IMF calculates imports actually grew in July by 2%. And while the amount of goods imported has declined, imports of services are in double digits.

China’s real-estate sector has also fomented concerns. But Mr. Rhee said there are signs property prices are stabilizing. That is not to say the IMF believes there is no cause for apprehension. Beijing fueled its stellar growth rate over the last two decades through cheap credit. Souring global growth prospects revealed a country vastly overinvested in manufacturing capacity, particularly by state-owned enterprises. The IMF estimates overinvestment totals nearly 25% of the country’s growth domestic product. That means government-owned firms will struggle to pay their loans on mountains of credit. “If they mismanage the financial market, then they could have a hard landing,” Mr. Rhee said.

Beijing is facing a daunting task. Winding down the amount of credit in the system too quickly could stall growth. But failure to cut corporate debt levels and deal with bad loans quickly could create a bigger credit crisis over the next couple of years. “One question is whether China can manage this transition with the current governance system,” the senior IMF official said. “That is a critical issue.” Beijing will need to ensure government agencies take greater responsibility for their respective areas of oversight and state-owned companies will need to have stronger budget constraints, he said. China’s recent market turmoil revealed a weak regulatory structure. And overhauling a political system that relied on state-owned firms to boost growth and enrich regions is also expected to be a challenge.

That’s why, even though the IMF is backing more stimulus by Beijing to prevent too much deceleration in the economy, fund officials are concerned the government may depend too much on the old system of juicing the economy through credit. Counting on monetary policy, rather than using the budget to stimulate the economy, could exacerbate the problem of overcapacity.

“If they rely on monetary policy too much, then they would continue the classic credit expansion,” Mr. Rhee said. Besides fueling bad investments by state-owned enterprises, it could also “drag on necessary structural and governance reforms.”

Source: China Pessimism Is Overblown, IMF Says, Citing Booming Services Sector – China Real Time Report – WSJ


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