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Archive for the category “Economics”

Willing to Pay – On the Cost of Living in China

In December of last year I made a statement that startled the students enrolled in my Chinese economic development course: that prices overall in China were high relative to prices of goods in the United States. They were surprised because the consumption choices of American college students studying abroad in China often do not go far beyond that of an inexpensive bowl of noodles, a few Qingdao beers on a Friday night, and a bagful of knock-off brand name clothing from the Silk Market.  But the rising Chinese consumer, whose consumption habits require much more than food and clothing, faces a very different basket of consumer goods, and most of those goods are sold at high prices.

To illustrate, here’s a quick look at the prices of housing, airfare, medicine, and cars in China.

The cozy 100 square foot classroom in which I made the above statement is located 15 kilometers from Beijing’s central business district, and if sold on the real estate market today it would list at 80,000 USD. By extension, the modest American 1000 square foot detached home with a yard would sell in Beijing for more than 800,000 USD. What’s more, the property bought in China comes only with a 70 year lease and limited to zero rights to the ground the property lies on. China’s high housing prices are far from a new story, but the outside observer and the Chinese home buyer is consistently befuddled at the persistence of these high prices.

Last month I looked into purchasing a roundtrip flight to Chiang Mai, Thailand from Kunming. The pre-tax cost of the discounted ticket was a surprising 1200 RMB ($190) but the tax burden of the international flight was an additional 2000 RMB taking the total cost of the two hour flight to over $500. The Chinese economy has the fastest growing demand for flights worldwide and an ever-expanding fleet but the consumer continues to face high prices in part due to a few state owned airlines being able to control prices through a regulatory framework that eliminates competition.

In most parts of the world, when the patent for a prescription or OTC drug expires, the price the patent holding pharmaceutical can charge drops drastically given the entry of generic competitors who have the opportunity to legally produce and market the drug under its generic name. In China, however, according to a colleague in the sales department of Johnson & Johnson’s pharmaceutical arm, the retail price of off patent, non-essential drugs does not experience a drop after the patent expires and generic producers rush in. In fact, where the US producer usually immediately drops the product line due to the inability to reap large profits from the drug, the former patent holder in China will tend to raise the price! Why? The Chinese consumer by and large doesn’t trust generics given the reputation for substandard drug producers to use shoddy, carcinogenic inputs.

To give a fourth example, last month I was talking to a friend about purchasing a Volkswagen Tiguan, the inexpensive sister to the high-end Volkswagen Touareg SUV – both models are seen in ubiquity on the streets of any major Chinese city. That friend quickly discouraged me from pursuing the Tiguan SUV (which sells at around $25,000 in the US but retails at around $35,000 in China) because on top of the high cost, car dealers, who collude across a city market to control prices, will charge an extra premium of up to $10,000 for cars that are in high demand! He said I’m better off buying a cheaper KIA or Nissan SUV (which are also seen in ubiquity on the streets). In an environment of perfect competition, the automobile consumer can bargain down the price of a car sale with a dealer, but in China the consumer is held hostage.

These high prices persist for a variety of factors, but the golden thread tying these four examples together and keeping prices high is simply that the Chinese consumer is willing to pay the exorbitant price offered for these goods.

Despite recent regulatory efforts, local governments in China and officials employed therein continue to take advantage of public funds to purchase things like cars, airline tickets, and houses. I posit that the aggregate purchasing power of this cohort, who cares little about the high cost of the transaction by facing a soft budget constraint, is able to prop up prices high above a fair market level. Thus the car dealer when faced with two customers, the average Chinese household and the government official, will consistently sell to the government official at the high price unless the Chinese household chooses the pay arbitrary premium. Last year an audit was performed at a government unit that a close friend works for, and he revealed to me that his employer had in its fixed assets inventory a fleet of 72 cars, but only 35 could be accounted for. The rest were in the personal unchecked use of government employees and their relatives. Extend this example across the tens of thousands of government units in China and a powerful and elite buying force with nearly unlimited funds at their backing emerges.  No wonder car dealers continue to collude and charge premiums on sales.

Generally speaking, every Chinese male is required by social norms to own a home and hopefully an automobile before getting married. Said simply, the demands of society can create a high demand for high priced items of which consumers have little choice but to purchase if they want to gain upward mobility. So with such high demand, are new goods flooding the market to meet this demand?

Observers, especially foreign ones, can, given the scale of new (and often empty) housing developments and the massive traffic jams, can easily be confused that markets are at equilibrium or perhaps even saturated.  To provide analogy, my American students often make the erroneous generalization that all Chinese people eat out at restaurants all the time because the thousands of restaurants in Beijing are usually packed at dinner time. But a city with nearly 20 million of people would require more than 100,000 restaurants to feed more than half of the population. Beijing has a lot of places to eat, but not that many.

Extending this to the real estate sector, let’s assume that, by and large, households are only buying newly built high-rise homes and that these developments are exclusively built in the cities.  Assuming half of China’s households are settled in urban areas and making another liberal assumption that newly built luxury housing complexes make up 50% of urban housing. These assumptions come together say that despite the feeling by urbanites that new housing is going up everywhere only 25% of the population can be supplied with new housing despite the high demand for new housing. High demand and low supply means high prices and that’s certainly what we observe. Indeed, Steven McCord, a real estate researcher at Jones Lang LaSalle has calculated that commodity housing built 1995 to date has only accommodated 20% of China’s urban population, a more accurate discovery that loosely fits my back of the envelope analysis above.

It’s simple economics: high aggregate demand and low aggregate supply drives high prices. So what this means is we’ll continue to see more new housing go up in cities especially as the pace of urbanization and rural to urban migration picks up in the next decade.   Extending the example above to cars suggests that traffic jams will never be alleviated.  In other words, what we are seeing now in terms of housing provision and cars on the roads is just the tip of a massive iceberg comparing to what the future may bring assuming the economy chugs along without a major bump or crisis.

So with supply growing to meet demand, won’t the high prices fall?  With soft budgets in government units, a quality control gap, and a dearth of viable investment options outside of buying an apartment prices are likely to remain high.

If determining factors of the four examples above persist, producers will continue to reap high profits, and the government regulator will continue to bring in high tax gains. Sustainable economic development into the future requires China to make a transition to a robust consumer-based economy and a strong welfare state that wisely allocates tax revenues and redistributes income. High incomes to producers and officials who take advantage of taxes to line their pockets (and garages) prove as obstructions to this necessary transition and create an unlevel playing field.

Moving forward, government regulation must increase quality monitoring in all sectors and to drop demand in luxury housing, reformers must increase the provision of low and middle income housing AND widen channels for household saving so that savers look outside of the housing market for investment opportunities.  I’ve never been one to advocate excessive liberalization, but without a reform package that expands private markets, curbs corruption, hardens budgets, and delivers meaningful tax reform, high prices will persist and the Chinese consumer will continue to pay a lot more for less.

Blue Devils on the Silk Road

Ministry of Education Preliminarily Approved Since December 2012.

Ministry of Education Preliminarily Approved Since December 2012.

The Duke Chronicle has reported that Duke Kunshan University, a joint venture university between Duke University, Wuhan University, and the city of Kunshan (connected to nearby Suzhou and farther Shanghai by high-speed rail),  has stalled due to communication and funding problems, the fifth delay in three years since Duke made its first agreement with Kunshan authorities in 2010. Although construction had begun by mid-2011 (in 2009, Duke announced the campus would open in Fall 2011), Duke didn’t suspect anything was amiss until early 2012 and didn’t find out that the developer, Kunshan Science, Technology and Education Park, was hiring unskilled workers and lowballed cost projections, leading to corner-cutting. Now they aim for a Spring 2014 launch.

Much of the campus’ construction has been plagued by information failings and lost or simply ignored requests. Communication between contractors and designers—sometimes between 40 and 50 different groups—was poorly managed, and there was no Chinese government team specifically charged with managing K-STEP’s progress on DKU, said Duke project manager Dudley Willis.

Duke committed $5.5 million toward design and construction oversight for the project in 2010. The money pays for several private American-based firms, including Gensler, Syska Hennessy Group, Thornton Tomasetti and Jones Lange Lasalle. The latter firm currently has five on-site people—up from three in earlier years. The firms identified problems but did not have the authority to effect change. Although Duke officials visited the campus every two or three months, there was no representative on the ground in China consistently through the first few years of construction.

For all readers who have experience working on projects in China, I’ll give you a moment for the déjà vu to pass. Credit where credit is due, though, since Duke is sticking to its guns about not only facilities, but having unrestricted internet on campus. Construction apparently wasn’t the only cause of delay, since the Ministry of Education didn’t even give DKU preliminary approval until December 2012, and the quickest they expect final approval is the end of 2013, cutting it a bit close for a Spring 2014 first semester.

DKU will initially roll out a Master of Management Studies (MMS) from Duke’s Fuqua School of Business and a Master of Science in Global Health through the Duke Global Health Institute for mainland students. Duke no doubt expects these top-shelf credentials in business and bio sciences, targeted at élite professional mainlanders, will make the entire operation profitable. It’s possible, however, that Duke’s biggest battle yet will be with its own faculty, who will submit course recommendations this month. Notice the precious usage of “unique” and “special” here:

In planning courses, the committee is on familiar ground in some respects but also will meet unique challenges as a consequence of the campus’ location in China, Robisheaux said. The committee will emphasize quality, aiming to make every course offered at DKU similar in difficulty and subject matter to those offered on the Durham campus. The Faculty Committee on Courses is following its usual procedures to approve courses while applying them to the special circumstance of DKU.

Two Duke faculty also raised concerns about the project and problems faced by other “Anglo-Saxon universities” (one of them is a German professor) in 2011, when the Duke Chronicle also urged administrators to “get the faculty on board.” It’s true that elite universities in Beijing and Shanghai enjoy much greater freedom of access to information, online and offline. I don’t know if Wuhan, though in the top-tier, has the clout of a Renmin, Peking, or Tsinghua, which boast the highest number of graduates in the 18th Communist Party Central Committee [ZH]. Duke was originally partnered with Shanghai Jiaotong University, which is higher in the lists than Wuhan both in Party bigshot alumni and overall school rankings.

Meanwhile, NYU Shanghai’s inaugural class of mainland and international undergraduates begins this fall. Their institutional partner is East China Normal University, which ranks way below Jiaotong or Wuhan, but then again the host city government is Shanghai/Pudong, which has a bit more weight to throw at these problems than Kunshan – not to mention that I bet NYU has a thriving MBA alumni program in Shanghai, whereas Duke alums are thin on the ground in Kunshan. Stanford, meanwhile, opened its program on Beijing University’s campus last spring. Duke took the hard road choosing to build an entire campus in a location comparatively deprived of wealthy elites – we’ll see if it pays off. It’ll be interesting to see, particularly with NYU and Duke’s mixed student bodies, how they navigate Chinese and American student’s differing expectations not only about curriculum, but for dormitories, student services, and off-campus activities. Which group’s norms will be the standard?

No meaningful change in China without state sector reform

You can’t deny it.  Along with the high PM counts, there’s something positive in the air here in Beijing.  Recently, I’ve had more than a few conversations that demonstrate some kind of an uptick in confidence in China’s prospects post 18th party Congress.  Housing sales are rebounding which could suggest that the dismal drop in retail sales for the first 3Q in China could bounce back in the run-up to Spring Festival.  Xi Jinping is telling us about a China Dream and a Great Revival.  The ice seems to be cracking over the One Child Policy, and corruption exposés are on the rise.  It kind of feels like Christmas is coming in China.  And China’s Santa can buy a few more imported goodies this year for girls and boys given recent appreciation (less than 1%) of the RMB.

But the road to real change in China is a long one and can’t be equated to a once a year visit from a fairy tale character.  Real change in China will involve putting the country back on the road to reform and undoing many of the imbalances, failures, and negligence of the Hu-Wen regime.

I believe the most critical sector to watch is reform of China’s State Owned Enterprises (SOEs).  In 10 years, the Hu-Wen government essentially did nothing to deepen or strengthen the 1994 Company Law which set out to privatize and bring efficiencies to the state sector.   Now with the Youth League clique backpedaling, Xi and the Princelings will have a chance to rein in state-owned industrial sector. – after all the Princelings built the party profit machine in the 1990s vis-à-vis the SOE system.  The new leadership team will have direct line to 100+ central level SOEs in strategic industries as the Politburo holds power over the SOEs by guiding State Council policy and appointing firm managers.    Some firms rank among the largest and most powerful firms in the world.  In 2008, SOE profit alone made up 3.7% of GDP before the global economic meltdown and profitability increased at 10% rates year-on-year in 2010 and 2011.  SOEs are taxed at an extremely low rate so in a sense they are free to plow their profits back into their enterprises which helps sustain inefficiencies.

A successful SOE reform plan would seek to reduce corruption and inefficiencies while increasing profits.  Currently it is too simple for SOE managers and high-ranking officials to set up loose subsidiaries owned by their own relatives who then have access to state channeled resources and monopolistic conditions.  Further failures of the Hu-Wen reign are evident. In the prior decade SOEs and the party machine were unable to function on the world stage and purchase a foreign major firm like Unocal or move on Rio Tinto.  China is still a low-middle income country by most standards, but SOE executive salaries (government officials) now match the earnings of Western Fortune 500 CEO salaries, and they enjoy a grey bonus/share ownership structure that may eclipse those of their Western counterparts.  Stories abound of SOEs using their foreign subsidiaries or construction investments in Africa and Southeast Asia to funnel money to tax shelters in the Caribbean. Despite expressed government oversight, SOEs have been accused by domestic critics of conducting their own foreign policy.  And despite government demands to invest with overseas partners to promote learning by doing, reportedly the only recent successful partnership to date is the joint investment with Holiday Inn.   Here in Beijing, the largest food-producing SOE in China gets a majority of its income through real estate development.  How’s that for Socialism with Chinese Characteristics?

Richard McGregor reveals in his book The Party that CCP officials in the post-Tiananmen 1990s took on a  new philosophy towards party survival: the linchpin of further economic reform was maintaining public ownership of certain industries.  In other words, despite the downsizing of the state sector in the last twenty years, the Party will not survive without the state sector.  If the Party could come good on its commitment to curb corruption, close the income gap, and increase wealth and opportunities in the country’s interior, perhaps normatively the cacophony of discontent from the masses might simmer down.  In other words a new social compact would arise that permits the Party to get rich as long as it governs well.  But easier said than done.  And in China there exists an obligatory and moral code of obligatory helping your friends get rich (family run subsidiaries), and conspicuous consumption (hence the luxury watches and Ferraris).  Patronage lines will only be strengthened and fattened until death (or China Spring) do they part.

A major obstacle to reform is CEOs of SOEs are governed by two masters:  the State-owned Assets Supervison and Administration Commission (SASAC), the nominal owner and legal supervisory body over SOEs plays second fiddle to powerful CCP.  CEO appointments of the biggest SOEs are directly made by the Politburo.  SASAC is ill-funded and not able to set up respectable advisory organizations with teeth to fulfill its mandate, so it’s squeezed to satisfy a single function: ensure profitability of the SOEs.  With the profit motive and loose supervision, CEO’s can steer their firms virtually any way they wish as long as they please the Party patrons who put them in the driver’s seat.  Essentially, CEOs’ motivations are only curbed by the Party controlled selection system which determines their promotional prospects and political careers.  Party groups also penetrate deeply inside of the structure of SOEs to force party based decisions on the SOE’s business model.  Check out the story of Singapore Airline’s failed bid for China Eastern in 2007 to further understand the mechanics of how the Party trumps SASAC.

Many reform-minded critics have chastised Li Rongrong, former head of SASAC for his 2003 declaration that a state controlled economy was the foundation of CCP governance (p27), but perhaps Li is remembering lessons taught by Deng Xiaoping who implied in the post-Tiananmen era that party survival is based on forms and degrees of public ownership. Perhaps Li was really pointing a finger at the Party by implying SASAC needs to do be more effective in making sure the Party does not go too far in its abuses of SOES.  Misusing the state sector for personal gain threatens Party survival.

So from our perspective standing outside of the walls of the big black box, there are a few indicators worth keeping our eyes on over the next year that will demonstrate whether or not the darling Party Princelings act to continue to fatten themselves or choose the more tempered route of sticking to the SOE reform plan as laid out during the Jiang era for the sake of Party survival.  We should be watchful of regulations or announcements that boost the supervisory power of SASAC.  Check on the strength and composition of listed SOE’s boards of directors to get a feel for the rise or falling power of the Party’s grip on SOE leadership.  We can monitor whether SOEs are diversifying or consolidating core business competencies to correct market failure.

Further, it’s easy to follow changes in the corporate income tax rate (to SOEs or firms in general) or the profit dividend rate to SOEs.  Both taxes have been suppressed and low through the Hu era providing SOES with nearly bottomless and unchecked war chests. Increases in either of these rates would demonstrate a rising negotiating power of SASAC and provide SASAC with funding it needs to set SOEs on a pathway that would better ensure Party survival not party implosion.  Allowing the RMB to appreciate will force efficiency measures in SOEs and deepening financial institution liberalization could decrease the cash injections easily delivered to SOEs through the party patronage system.  Thus opportunities leading to corrupt practices could be curbed.

Let’s also watch for the first mention of the 1994 Company Law from official Chinese media outlets.  It’s been nearly 20 years since introducing the law which promised to deliver the good results listed above but it hasn’t been touched in a decade.  At the 2012 Caixin Summit, top China economist Barry Naughton received an accordant round of applause when he said that if executives of CEOs cannot implement the Company Law in their SOEs they should be fired. Kudos to Naughton for a bold and simple statement, and I couldn’t agree more.

Perhaps we should also use this measure to appraise Li Keqiang’s performance as well.  If Li can’t do it, then he can take a hike or what’s known in China as a ‘vacation style medical treatment.’

Chinese City Tiers: Cracking the Code

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If you read Chinese news with any regularity, especially on government projects and regulations, you’ll see references to city tiers. While this terminology is used all the time, no one seems to know exactly how it is calculated, and there’s disagreement as to which tier certain cities are on. According to Baidupedia, Beijing, Shanghai, Tianjin, Guangzhou,and Shenzhen are first-tier cities (一线城市), but things get confusing with conflicting reports about second-tier cities, and even sporadic mention of an elusive 1.5-tier, which may or may not include Tianjin. While general consensus seems to be that a city’s tier ranking is determined by population, GDP, and possibly other factors, Rectified has obtained the official formula from sources within the State Council:

(100US+50BB+250D)(45FC+100SP+200LS+1000CR)/(5000FB+1000AS)+(SB/SC)*(FC+BC+GT/SMW)

A full visual key to the variables after the break:

Read more…

Six Points on Social Insurance for Foreigners

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Author’s note:  This post has been modified slightly from the original to correct a couple of misstatements and reflect new information and concerns.  These changes are mainly found in the introduction below, points one, four, and five.

Starting in July, my coworkers and I will be among the first foreign residents of China asked to contribute to the Chinese social insurance system. Although the law was promulgated last October at the national level, Tianjin, like most major cities, has been slow to implement it locally. In fact, according to people at my company’s headquarters in Shanghai, Suzhou is the only other city which has enforced the social insurance law for foreigners working at training centers like mine. For many foreigners working in Shanghai and Beijing the social insurance tax is still something on the horizon.

The English language press published a flurry of articles about the law in fall 2011, but since then reporters seem to have tabled the topic, mostly because of the glacial speed of Chinese bureaucracy, but also because, for most foreigners, the tax seemed hypothetical, not something we could comment on directly. Now that I actually have to pay the tax, I went back and reviewed the original news articles for information, and also submitted a list of questions for the government to our HR department. After doing so I decided that there are six major issues for foreigners and their employers to think about:

(1) According to Chinese law, workers will be guaranteed retirement benefits after contributing to the system for fifteen years. However, during those fifteen years there is no interest on your contributions, though the government should provide something like a cost of living adjustment once you start receiving benefits. Every city will set its own contribution rates. In the case of Tianjin, I pay 11% of my base salary and my danwei “matches” with 33%. Much like Social Security in the United States, there’s an income cap, and any income above that level isn’t taxed for social insurance purposes. In Tianjin the income cap is 10,560 while in Beijing the cap is 12,600. Some of these funds go to medical insurance, unemployment insurance, and maternity insurance, but most are earmarked for retirement insurance. Given the rate of the inflation, the Chinese social insurance system represents a net loss for contributors, even more so than China’s low-interest savings accounts. Many of us will be wishing we could’ve spent the money while we had it – or put it into private retirement insurance.

(2) Most foreign workers have no intention to stay in China for fifteen years or more, and thus the issue becomes: how can I get my money back? Well, the government has assured us that we can get our own contributions refunded, but contributions from our employers will stay in the system. We have been told that to get the money back a foreign worker must sign a document declaring that he or she will never work in China again. However, this will certainly increase the rate of illegal foreign workers (see point 5 below), as many foreigners “swear off” China, leave, and wander back a few years later. A separate but arguably related issue is that most social insurance in China is being run on a city-by-city basis, and is not easily portable if a worker decides to move, but few foreigners want to stay in a single Chinese city for the rest of their life. What happens if I move from Tianjin to Shanghai? The government hasn’t answered this question yet.

(3) Like Chinese, foreigners should receive a social insurance card and corresponding social insurance number. There’s a fly in the ointment, however: is the Chinese system prepared for foreigners who get a new passport and thus a new passport number? Those of us who have been around long enough know that Chinese bureaucracy operates by analogizing passport numbers as Chinese ID numbers, yet Chinese ID numbers never change. Whenever foreigners renew their passports there’s a mad scramble at the bank, the phone company, and the local paichusuo (among other places) to update paperwork to reflect the changes. Most of the time we can’t get this done without letters from the embassy which endorse the passport renewal process. Considering the (potentially) large sums of money involved, and China’s track record thus far, one is left doubting the ability of the system to handle an essential fact about foreigners.

(4) One of the less commented upon yet more onerous aspects of China’s social insurance law for foreigners is retroactivity. When the central government said that the law went “into effect” in October of 2011, they really meant it. Even though most Chinese cities have been lax in implementing the law, the requirement of retroactive payments has been sitting there like a time bomb waiting to go off. The first time a foreigner has to pay social insurance it’s probably going to be a massive hit – at the time of this writing foreigners and their employers will have to pay up to 9 months of tax in one lump sum. The degree of retroactivity seems to vary from city to city and even district to district, but Tianjin seems fairly consistent.  Consider a foreign teacher employed at an international school in Tianjin with a hypothetical base salary of 18,000 RMB/mo. and benefits worth 7,000 RMB/mo. The teacher would have to forgo more than half an entire month’s salary in back taxes (10,454 RMB, to be precise), while his/her employer would have to pony up more than 30,000 RMB. Afterwards this teacher will still be paying an extra 1,161 RMB in taxes every month while his/her employer will be paying roughly 3,500 RMB in tax.* Those expensive kindergartens with foreign teachers in Beijing just got even more expensive, which leads me to…

(5) The law only applies to foreigners with a “Foreign Experts Certificate,” aka the “work visa” aka the Z Visa aka the Zed Visa. Here’s where the perverse incentives come into play. If a foreigner has a tourist visa, business visa, or marriage visa and is thus working illegally (Yang Rui knows who you are!), he/she won’t have to pay into the system. In fact, the requirement that employers must make contributions on our behalf means that, all other things being equal, an illegal employee is going to be considerably cheaper than a legal one, even if the foreigner in question has exactly the same contract salary as his/her legal counterpart. Moreover, employers during the next round of contract renewals may decide to pressure employees into changing their visas and working illegally so as to cut costs, and foreigners themselves may agree, figuring that the risks of being one of the san fei is worth the benefit of paying fewer taxes. At the same time, an employer wishing to stay aboveboard may decide to keep employees legal but refuse to offer raises during the next contract on the grounds that we are now receiving the “benefit” of social insurance.  We haven’t even factored freelance workers into the equation – those working legally should fall under the aegis of the social insurance law, which begs the question of whether they or their employers are prepared to pay the tax.

(6) Many of the above complaints and concerns could be addressed or alleviated if China reformed its green card process. For those of us who have worked here for an extended period of time or are married to a Chinese national, it’s frankly ridiculous that we have to renew our visa every year or have a work visa that ties us to a single employer’s tender mercies. Yet, despite periodic talk about making green cards easier to obtain (which recalls similar talk about ending the hukou system for Chinese migrants), the Chinese green card quota remains out of step with China’s aspirations to be a global leader. That foreigners are now being asked to contribute to a social insurance system that they are not actually guaranteed access to only adds insult to injury.

Matthew Stinson is a Floridian stalking the urban wilds of Tianjin since 2004. An educator, writer, and photographer, he pens 140 character rants as @stinson

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* Before anyone shouts “Wait a minute!” the above calculations may not reflect final tax burdens, insomuch as a foreign employee’s base salary may shrink and bonuses and benefits may grow in response to the law.

Commencement advice to all my “师弟” and “师妹”: What you’ve learned matters, but learning to be professional is important too

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Once I recommended one of my friends for a job in my company. I knew her personally and believed that a very smart girl like her should have no problem getting the job. However, when I saw her wearing a pair of Converse All-Stars to the job interview, I knew immediately that she would have trouble getting people to take her seriously for the position. Dressing properly for a job interview is basic common sense, but surprisingly many young Chinese still don’t get it.

My friend’s case is not isolated. Over the years, I have heard many of my foreign friends complain that their Chinese colleagues are “unprofessional.” Of course, there is the question of just what “professionalism” even means. It could simply mean small details like shaking hands firmly and looking at people in the eye when talking to them. It could also mean dressing appropriately for a particular job. For example, if you are a teacher you probably should not wear jeans or an evening gown to work. Professionalism could also be taking initiative at work without always worrying about “this is not my job” or making constructive suggestions and solutions  to your boss rather than just complaining or whining about the problems.

To be fair, this isn’t only an issue for young Chinese. Many young people around the world face this kind of challenge when they start to have real jobs. However, I feel that Chinese young professionals have a steeper learning curve about professionalism compared to their peers in European countries and in the US.

First, unlike many American kids who work at part-time jobs during their summer vacations or after school or participate, many young Chinese have never worked until the day they find an internship in college or their first job after graduation.  They don’t know how to cooperate and collaborate with their co-workers or negotiate with their bosses regarding salary. It also doesn’t help being an only child in the family without siblings to teach us the need to compromise and share.

There’s also an issue of family cultural capital.  Like many people in their generation, my parents worked in state-owned factories. They went to work at 8:00 and came home at 5:00 every day for their entire life. They didn’t need to wear suits to work. As long as they didn’t want to push for a promotion, they could just have a stable easy time. The key was to listen to their bosses and not to make mistakes. Thus, nobody in that situation wants to take any risk or responsibility. Taking initiative is not encouraged either.

Consequently, many young Chinese don’t know how to behave in a professional environment. I was one of them. I had my first internship when I was a junior in university. I couldn’t figure out why my colleagues in the company were so mean and what I was doing wrong. That internship only lasted for ten days.

Luckily, a few years later, I had a great opportunity to intern at the Mayor’s office in Haverhill, a little city in the Massachusetts, and learned how to be professional from one of my colleagues. Jeff was a student at Harvard Kennedy School. At the age of 26, he was already a young politician in his home state, having been elected as a state legislator.  From watching him, I learned the importance of a professional appearance, how to answer phones, how to handle crazy visitors in the Mayor’s office and how to take initiative in the job.

When asked to do something, he never replied that it wasn’t his job so he didn’t need to work on it. Once a town visitor called the Mayor’s office randomly from a highway and asked for direction to Haverhill. It is unbelievable in China that you just call the Mayor’s office for directions. However, Jeff answered the phone, looked up Google maps and explained to the visitor nicely how to get to the town.

It’s not about “Chinese” practices versus “Western” professionalism either.  Professionalism is professionalism.  Do your job. Take initiative. Be forthright. Respect your co-workers and your clients. Don’t take short-cuts if it means harming your or your company’s reputation.  And yet, my experience working with many companies in China is that these basic standards are often lacking, and I worry that it’s hurting our competitiveness, especially as China seeks to move to a more service-orientated economy.

Over the years, I have been lucky to receive advice from my family and mentors on how to do my job right. I also see more and more young Chinese operate according to the same professional standard. I am in a company now with about a dozen foreign colleagues and a dozen Chinese colleagues working side by side. Ten years ago, it would be very difficult for an office like this to function. However, today everyone in this room works seamlessly together because everybody more or less follows the same protocols and standards for professionalism.

My concern is that many Chinese young people feel that success is solely dependent on credentials or guanxi. Sure these are important.  As is having a solid skill set.  After all, what you know and what you can do is the most important thing.  But without the right demeanor and attitude – the soft skills – then it will be hard to find people willing to give you a chance to show what it is you can do.

Good luck.

“Authoritarian modernization always works until it quite suddenly doesn’t”

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Among China watchers there has long been a holy schism/false dichotomy between those who argue China’s model is inherently doomed to fail and those who are more bullish about the future.  Where one stands in this debate can depend on a host of factors including (but not limited to):

  1. Political inclinations
  2. Confirmation of pet economic theories
  3. A pathological need to know that, deep down, my country/system of origin is just better.
  4. The extent of China-based investments (stocks, start-ups, restaurants, real estate, or modern art collections)
  5. Wanting to sell books, no matter how dubious the research
  6. Wanting to piss people off on Twitter, no matter how dubious the tweet
  7. Because blogging (Read: Writing for free) is much more rewarding when people hate you.
  8. Because the mustache needs feeding.

We need not name names but I think you get the idea.

Central to the debate is how an authoritarian, one-party government can continue to provide the benefits of economic growth, development, and modernization to a growing number of people while maintaining a tight grip on power.  Faced with this conundrum, most watchers react in one of five ways (and yes, I’m oversimplifying):

  1. It works. People are happy. Besides, what we are seeing is sui generis, past economic/historical models don’t apply.
  2. It kinda works. Most people are happy (especially if you have an urban hukou, some real estate, and good connections) but does anybody else think it’s weird that all my friends — especially those who claim to be so happy and that they support the government — are applying for Canadian citizenship?
  3. It works but it’s completely immoral.  People need democracy and human rights.  Waaaaahhhh.
  4. It doesn’t work.  It’s all a façade which will come crashing down in…wait…hold it…just a little bit longer…and….oops, one more second…let’s all count down together….3….2…1…1/2….1/4…..
  5. White people suck.

Sticking with number one, for a moment, while it’s hard to argue against the efficiency of the system, those who say that this is a novel and fresh approach to government tend to remind me of the people I knew in back in college who thought Guns ‘N Roses had written “Knocking on Heaven’s Door.” (Best parallel metaphor, a friend who thought everybody else was an idiot, because he had the Clapton album with the “original version” on it. And again, I’m not naming names.)

Walter Russell Mead posted a long-ish piece yesterday on this very subject in which he argues:

Authoritarian modernization always works until it quite suddenly doesn’t; many observers hailed Stolypin’s reforms in late Czarist Russia and spoke in awe about Russia’s rapid industrial growth in the years before World War One. At Via Meadia we’re not able to give assign a date to the China correction that lies in store; the current slowdown could be a blip on the screen or the start of something more consequential.

I know there will be people (see above) who are going to nitpick Mead’s argument, but you have to give him credit, he attacks a basic supposition of contemporary China with a fury most people reserve for malfunctioning, poorly maintained office equipment* and there are sure to be plenty of people who are going to be upset by this comparison:

China babble has reigned among exactly the kinds of people who used to marvel at Hitler’s autobahns, Stalin’s steel mills, and Mussolini’s ability to make the trains run on time.

Nothing like risking invocation of Godwin’s Law to spark a little debate. For what it’s worth, I’m not quite as pessimistic as Mead, but I do think the cracks are showing and the incoming leadership will need to make some difficult political choices if it is to continue pursuing its twin goals of economic development and one-party rule.

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*Even over a decade after I first saw it, few scenes in film history can make laugh out loud as reliably as this one.

Testing Your Corruption Goggles

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My evening Air China flight from Chengdu to Beijing last week was delayed due to bad weather in Beijing.  After waiting in the airplane on the runway for takeoff for three hours and then another two hours in the airport, Air China made the announcement at 11:30pm that the company would put the passengers up for the night in a “nearby” hotel.  We were given direction to buses parked outside the airport, and as we drove by the Air China hotel located conveniently outside of the airport, I thought “Here we go again, another long drive through the suburbs to some far-away hotel for a three hour rest only to take the long drive again to the airport in the morning.”

Why couldn’t Air China put the passenger first and put us up at the airport instead of driving 30km to some third-rate hotel where I had to pay an extra 120 RMB in order not to share a room with a strange and snoring fellow passenger?  Looking around the lobby, indeed other passengers were asking the same question.

To answer this question, we need to don our corruption goggles.  You know, the lenses that help us see how pirated DVD sellers get to stay on the block, day in and day out;  those spectacles that allow privately-driven-but-publicly owned autos on Beijing’s third ring road to glow like the red ooze that paid for them; or the x-ray glasses that penetrate the concrete walls of the CCDI’s detention center to reveal Wang Lijun removing a tattoo “Neil” from Bo Xilai’s six-pack using skin grafts from dead Chinese prisoners.

Today’s corruption goggle lesson is a focus on a ubiquitous corrupt practice: over-invoicing.  Over-invoicing is a popular mechanism used in both government organizations and private firms in China and the rest of the world to embezzle funds.

To illustrate how this works, imagine that your firm or relevant organ needs a new computer and budgets 3500 RMB for said computer.  In a cash-based economy, like China’s, where prices are settled through a negotiated person-to-person haggling process, a manager sends his employee with 3500 RMB in cash to the market make the purchase.  The employee bargains the price of the computer down below the budgeted level – say to 3000 RMB.  This is savings for the firm, right?  Wrong, the employee then requests the seller to create an official invoice for 3500 RMB and the employee, pockets 500 RMB.  Well not exactly.  The seller needs something out of the deal too, so he and the employee split the difference at 250 RMB each.

Is the firm worse off?  The purchase still came in at budgeted price – or even under-budget which makes the manager happy.  The receipt goes on the books and the employee’s effective wage has increased in a piece-meal fashion.  (In a variant form, sometimes the seller needs to receive the full 3000 to produce this receipt.  Here, he throws in an extra gift, say an external hard drive.  The buyer pockets the hard drive, and the seller gains the profit.)

Extend this example through the accounting system (i.e. bank manager as the seller; construction foreman working on your housing decoration project as the employee; provincial railway official applying for funds to build a high-speed rail network) and by donning our corruption goggles we can begin to observe the systemic and ubiquitous penetration of embezzlement practices throughout the China.

Last week I was talking to a friend, Cheng, whose lines of businesses range from retail fashion to IT repair to high-end dining services – a true gold standard of diversification.  He regaled me with his latest project – building five buildings within an 18 building luxury housing project.  Typically, launching into the real estate development business takes experience and capital, but not for this guy.

To provide context on his opportunity, the five buildings are to be used to relocate villagers whose homes were demolished to build the luxury lot; therefore, it’s a government sponsored project with very little oversight.  He and two other business partners bid among other investment teams to win the project – they put up zero capital and had zero experience in construction.  Yet their 90 million RMB bid won – thanks to the secret ingredient of a 3 million RMB bribe to a bank official!  So now they have a grant from the local government for 90 million, but what they didn’t tell the grant issuing bank was the project will only cost 70 million (over-invoicing in not-so-competitive bidding form).  So minus the 3 million for the bribe, the three investors split the difference of 17 million RMB in government funds.  To top it off, they can put 50% of the apartments in the five buildings on the market to make even more money.  Again, all for zero money down and zero experience at building apartments – not bad for a day’s work.  Why can’t I get in on this deal!!

Getting back to the China Air example, have your goggles led you down the road to true vision?  The hotel services 30km away are listed at a much cheaper price than the Air China owned hotel due to low rents in the suburbs and distance from a prime location.  Air China can charge itself a high price for a hotel room in a prime location and produce a receipt.  The airline is not worried about cost-savings with knowledge that as a state-owned enterprise it can engage in morally hazardous financial practices and rely on a bailout from the central government at nearly any time (indeed it may be getting one soon!).  Then it can then pay the cheap Podunk hotel at cost and then reap the difference in between.  I love it when opportunities are created out of crises (that you’ve also created).

In this game, all you need is a middle man who is willing to play the game with the marginal opportunity of creating an official receipt for you, and you can steal money.  In my next post, I’ll explore the growing role of the semi-private middle man in rising corrupt practices in China.  For now, let’s set our corruption goggles to glow pac-man yellow for middle-men!

 

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