March 2010 Archives

TCC Cover.jpgThe new edition of The China Compass has just been released, and can be downloaded free of charge below.

The China Compass is a knowledge tool by the China Strategy Group, a business unit of THE BEIJING AXIS. The publication is an extended chart pack examining China's current economic standing in the world. In this March 2010 edition, we provide the latest macroeconomic data available for a wide range of indicators, for China as well as for other major world economies, and include a new section, ‘What’s New: China From Rebound to Recovery’.

The publication summarises a wealth of information in an easily accessible format, and as such is intended to make China's complex economic rise a bit more comprehensible. 

To download The China Analyst - March 2010 (Size: 2 MB), click here:

The China Compass - March 2010.pdf

For more publications by THE BEIJING AXIS, please visit the Knowledge section of THE BEIJING AXIS website. 

A few months ago, as part of a long string of protectionist-oriented disputes involving China, the heads of 30 industry groups from North America, Asia and Europe wrote a letter to Chinese ministers in protest of a recent law involving the procurement policies of the Chinese government. From October 2009 onwards, China’s public purchases were to start favoring domestic technologies. The legislation was deemed a significant blow to trade for international high-tech firms, as China’s government procured USD 88 billion worth of goods and services in 2008, including 14% of the nation’s 40 million PC purchases.

The favoring of domestic enterprises is not an issue exclusive to China, however. Although over 20 countries have signed on to the World Trade Organization’s (WTO) Agreement on General Procurement (China has not), it is scarcely followed at all.

In the WTO’s own words, the agreement, “[has] not worked well”. It requires “non-discriminatory practices and open procedures in government procurement among member states, and covers not only central government purchasing of goods… but also procurement of services, including public works, and procurement at the sub-central levels of government. Procurement in public utilities is also included.” This applies only to contracts valued above a certain threshold, as set by the WTO for various procurement categories; below the threshold, countries can be as discriminatory as they please.

Participants are supposed submit statistics of their procurement activities on an annual basis, to include countries of origin and totals. Only eight countries have bothered to present anything at all. Their submissions suggest anything but engagement in “non-discriminatory practices”.

  • Norway: The most recent statistics are from 2005. Of the USD 1,215 million procured, only 1.3% of supply, 6.9% of service and 1.3% of works contracts went to foreign companies  
  • South Korea: In 2004, the most recent data from South Korea, procurement contracts were valued at over USD 25 billion. Less than 1% went to foreign-based firms, these almost exclusively entered into by the Ministry of National Defense with firms based in the United States, Germany and the Netherlands
  • Japan: 98% was procured domestically in 2008. Ironically, its Foreign Trade Commission did not contract at all with foreign-based companies
  • US: The US submissions to the WTO are not broken down by country of origin. However, the website of the US Federal Procurement Data System does give this data, although buried within around 100 xls files – one for each federal agency. Sampling these files reveals that beneath the column heading “Country of Origin”, if there is anything at all, there is only 'US.' The USD 417 billion procured by the US in 2007 most likely came from its own 50 states
  • Switzerland: Switzerland reports the highest proportion of overseas procurement. In its most recent submission of 2003 data (in French), it lists 60% of its above-threshold contracts going to domestic bidders, 29% to US firms and 9% to the EU, with 2% categorized as “other”
  • Canada: does not list country of origin. The country reports 1,759 contracts made in 2007 valued at USD 1.9 billion
  • Hong Kong: consistently submits a two-page document with their name, the date, and nothing else of informational value.
  • Liechtenstein (yes, Liechtenstein): This constitutional monarchy of 35,000 people is a model of transparency. It lists all 109 of its 2008 government contracts, and even goes so far as to give the name of the company it has procured from. Somehow even tiny, landlocked, mountainous Liechtenstein manages to largely avoid procurement from abroad. Besides domestic contracts, there were only a handful from Switzerland, two from Iceland, one from Germany and one from Austria.

It seems discrimination in government procurement is a worldwide phenomenon. If the heads of these international industry groups want the Chinese government to partake in fairer procurement practices, the first step may be to convince their own governments to do the same.


If you follow business news at all you have probably read these words: “China is Dubai times 1,000 – or worse”. Jim Chanos and several other 'China bears' foresee doom in China’s economic future. They argue that eased credit has led to asset bubbles, particularly in real estate. Hence they call for shorting China’s economy, with the belief that the country is set to experience a disastrous crash. But there is at least one glaring omission in the bears’ analysis: they fail to account for changes in China’s demographics and its tremendous potential to impact the economy.

How important are demographics? A paper published in 2005 by the US Federal Reserve suggests that a nation’s working age population, ages 25 to 64, may ultimately determine shifts in real estate prices. Remarkably, the model employed here accurately anticipated the real estate boom and busts of Japan’s market in 1974 and 1990, the movements in prices in the US, Great Britain and Ireland, and even foreshadowed the current collapse in real estate prices recently experienced by these countries.

Just as the populations of the United States, Japan and Great Britain were influenced by the Second World War to create a generation of baby boomers, so too have events in China influenced its demographics. At the end of the Great Leap Forward in 1961, there was a surge in the birth rate, which gradually subsided due to family planning measures implemented by the government. This generation then began having children in the 1980s, creating another spike in births despite the implementation of the One Child Policy in 1979.

Those born during the spike of the 1980s are now entering working age. The result is that the working age population in China is now at a historic peak. Numerous Chinese people turning 25 are entering a period in life where most finish their university studies, find jobs, get married and buy houses – in China often with the financial assistance of their parents, likely of the previous boom generation. If the logic of the Federal Reserve’s paper holds for China as it did for other countries, the substantial increase in working age citizens is likely the main driver behind China's real estate prices.

working age graph3.JPG Source: UN Population Division; THE BEIJING AXIS Analysis

Furthermore, people in China are increasingly moving from rural areas to cities. This is certain to continue, as China still has a low rate of urbanisation compared with most countries. As of 2008, only 43% lived in cities compared with 82% in the United States. The drastic rise in the real estate prices of Beijing and Shanghai are likely an indication of increased demand due to the trend toward urbanisation rather than evidence of a calamitous property market bubble.

Another point the paper makes is the influence the working age population has on real interest rates. Through a tendency known as 'consumption smoothing', people tend to save when they are more productive during their working years in order to consume when they are less productive – retirement. Not only are savings invested in assets with fixed returns, but also in riskier assets such as stocks. However, in China there are capital controls in place which not only include legal barriers for equity purchases by foreigners, but even more so restrict Chinese citizens from purchasing shares abroad. The result is that China’s working age population – at an all time high, in a country with one of the highest savings rates in the world – is largely confined to domestic equity markets, perhaps driving up prices to what may be perceived as bubbles.

The China bears who recommend short selling Chinese stocks should take note. The negative effects from eased credit conditions in China, although not completely unlikely, have yet to be seen. As for now, there are around 740 million reasons – the current number of China’s working age population – to be optimistic about China’s economic future.

Photo: Shirin Neshat, New York magazine

More manufacturers jump on the 'green' bandwagon amid stricter export regulations, growing alternatives and rising demand.

Treading the 'green' path is on the rise among manufacturers in China, albeit at different levels of adoption. Be it in the garment, jewelry, stationery, paint or consumer electronics industries, more companies are adopting ecologically safe materials, including recycled substitutes.

Suppliers are motivated by two main factors. Most are compelled to do so because of increasingly stringent product regulations in their key export destinations, namely the EU and the US. RoHS (Restrictions of Hazardous Substances), for example, curb the use of elements and compounds that are perilous to the environment. Among these are lead and cadmium. Although the EU directive applies only to electronics products, makers in other industries such as fashion jewelry are taking heed and dispensing with these substances.

A few are tapping the eco-trend as a marketing tool to help them move into upscale manufacturing, away from the cutthroat competition of the low end. Because there is a premium attached to green models, companies can charge 5 to 50% more for these items.

Natural, Sustainable Alternatives

Apart from ensuring components are free from toxins, many companies are incorporating materials that are grown with as little impact on the environment as possible.

Cotton farmers are the leading users of insecticide globally, accounting for 16% of total consumption. Organic cotton that is cultivated without toxic pesticides and synthetic fertilizers promotes healthier products, preserves biodiversity and reduces the amount of noxious chemicals which seep into the environment.

Tencel, which is a brand of regenerated cellulose fiber made from dissolved wood pulp, is another eco-friendly material that is often used in pants and in coats. It is normally mixed with cotton at a ratio of up to 1:3.

Rayon from bamboo is also incorporated in the production of garments. Aside from being biodegradable, it is one of the most efficient natural fibers in terms of moisture absorption and breathability.

Other natural materials that makers are turning to are silk, bamboo charcoal, and soybean and milk protein fibers.

Apart from the textile application, bamboo is being employed as an alternative to wood, which is currently in short supply. Some makers have even found ways to reshape the naturally hollow and cylindrical plant by processing it in high-pressure machines.

Bamboo's short maturity cycle, wide availability, and proven strength and durability make the material not only an ecologically safer option to wood, but also a more profitable one.

Recycled Substitutes

Wood pulp, the most common material for making paper, has been linked to a number of environmental issues, including deforestation, and air and water pollution. This has prompted suppliers to turn to earth-friendly alternatives, which are becoming increasingly available. Among these are non-wood pulp paper, including cotton, bamboo and reed pulp, as well as bagasse and stone variants.

Recycled paper such as the kraft type is also a green option. In terms of quality, recycled paper holds up against conventional versions. It has some usage limitations, however, including unsuitability for color printing.

"Although products made of eco-friendly paper are priced higher, the acceptance of customers is high. Both our old and new customers place orders actively for such products," said Wang Hao of Zhejiang Guangbo Group Co. Ltd, a stationery maker.

Toy makers cited recycled sawdust, which is usually discarded as a wood byproduct, as a suitable substitute material. Apart from yielding environmental benefits, it improves crack- and heat-resistant properties in toys such as role-play sets. Being easier to process than wood, this alternative also has a shorter production time and simpler molding procedures.

In the beauty and cosmetics line, the trend is reflected in the simpler and recycled or recyclable packaging being adopted by many makers. Refills are likewise being promoted with greater frequency.

Read the rest of the story at Global Sources, a leading business-to-business media company and a primary facilitator of trade with China manufacturers and India suppliers, providing essential sourcing information to volume buyers through our e-magazines, trade shows and industry research..

In February this year, the World Famous Brand Assembly (WFBA) announced that 88 of the world’s top 500 brands are Chinese. Of these 88 China-based brands, 79 are from the mainland, six are from Taiwan and three are based in Hong Kong. China’s representatives on the list were predominantly state-owned firms, notably oil companies such as China Petroleum and Chemical Corporation (Sinopec) and China National Petroleum Corporation (CNPC), although appliance manufacturer Haier Group was also included. Many of China’s banks were also positioned among the best brands. The list of 500 included 130 representatives from the United States, 60 from Japan, and 35 companies from both Germany and France.

This marks the most favorable international brand recognition to date for Chinese companies. In 2005, WFBA included only 27 Chinese companies in its list of 500. Other global brand rankings still do not have a significant Chinese presence, however. A 2009 top 100 brands’ list produced by Interbrand for Business Week magazine was topped by the usual suspects – Coca Cola (1), McDonald’s (6), Toyota (8) – without a single Chinese representative on the whole list. Another by Millward Brown entitled 'BrandZ Top 100' reserved five places for Chinese companies. China Mobile made it into the top ten at number seven. The remaining four were banks.

The discrepancies between the lists are due to different evaluation techniques utilised in each ranking system. To qualify for Interbrand’s list, for example, a company must derive at least a third of its earnings outside its home country, must be recognisable beyond its customer base, and must make its marketing and financial data publicly available. These standards, particularly the first, would eliminate most Chinese firms, and is part of the reason why Wal-Mart and Visa are also not recognised.

China’s ‘going abroad’ policy is a relatively new phenomenon. Chinese companies will increase their earnings abroad, become more widely recognised and achieve a greater presence on these lists of leading global brands. So we will be keeping a look out for a China-based company in Interbrand’s list for 2010.

In 2008, about 130 million people worked as rural-to-urban migrants in China's cities, making up around a third of the total urban labour force. As they are heavily active in exporting sectors that were impacted by the downturn in the last two years, around 15% of the migrant workers (or 20 million people) are said to have lost their jobs in 2008 based on a survey carried out in 15 provinces by the Ministry of Agriculture in January 2009.

But that was then. Now in 2010, various media reports in February highlighted a shortfall of a many as a million migrant workers in Guangzhou and Dongguan. People's Daily has published statistics collected by Guangdong's human resources and social security departments stating that by February 22 this year, more than 3 million migrants had returned from other provinces to Guangdong, much less than the almost 7 million migrant workers who had originally left for the Spring Festival holiday. Guangdong's enterprises, the report stated, currently lack the services of about 900,000 workers, of which most are needed in labour-intensive industries, although technical workers are said to make up 32% of the shortfall. In Dongguan, more than 20% of migrant workers are not expected to return to work now that the Spring Festival is over, according to one survey

So what happened to China's migrant workers? Much of the reason for the current shortages is being put down to the explanation that the pressures forcing migrant workers to industrial zones in the big cities are just not so intense, at least not now. Due to gradually increasing incomes in rural areas and the growth of second- and third-tier cities, many workers no longer have to make the trek to Shanghai for menial labour, or they can go somewhere else closer to home.

Consider for example the following chart, illustrating the changing income levels in rural and urban areas in China in recent years:

Incomes.jpgIncome levels of both urban and rural households have been steadily increasingSlide 2, and while urban households initially experienced higher growth rates compared to rural households, this disparity has been decreasing in recent years, and the convergence is especially evident since 2004 (see above). So if things are looking up in the countryside, why bother at all going to the big city?

The current shortage of migrant labourers is not the first time this has happened in China; in fact, the economic upswing of the same year (2004) also caused labour shortages in the cities (see source 2 below). The cities are not taking it lying down, however, and apart from simply raising wages, much is being done to continue attracting migrant workers. Shanghai will this year become the first Chinese city to provide free education to all school children of migrant workers, and a government advisor in February announced that young migrant workers will be granted more social service benefits and will be assisted to buy or rent homes in smaller cities closer to their home villages, not in expensive places like Beijing or Shanghai. The government is apparently also considering amending its election law to increase the number of rural representatives that can be elected to the legislature from the current one deputy for every 960,000 rural residents. 

Yet while many migrants are enjoying the luxury of choosing to stay away, many more of them are inexorably drawn into the cities with all these locations have to offer. Over the past decade, over 200 million people have entered the cities through official or unofficial migration, and the share of agriculture in employment has declined from 326 million in 1998 to 270 million in 2008. As a rapidly developing economy, China's urbanisation rate has increased from 18% in 1978 to 44.9% in 2008. Yet throughout the country, less than one quarter of the rural population has migrated
(see source 2 below), suggesting vast potential for further migration as China's urbanisation rate increases.

And today's migrant workers are different from older generations who only laboured on building sites. Now, a new generation - born after 1978 - plays an important role in city life, and People's Daily has described them as white collars who now pay much more attention to their own labour rights and are opinionated on equality and fighting discrimination.

No surprise then that many migrant workers choose not to return to the cheap factories in Guangdong and Dongguan. 

Further reading on China's migrant workers:

1. How much do we know about the impact of the economic downturn on the employment of migrants? (Meng, Kong, Zhang), ADBI Working Paper Series, February 2010.

2. China's labour market in transition. Job creation, migration and regulation (Herd, Koen, Reutersward), OECD Economics Department Working Paper No. 749, February 2010.

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