Sneak Peak On China 2007
Just came across another thoughtful set of predictions for China 2007, this one from Shu-Ching Jean Chen of Forbes Magazine:
- "The Chinese Communist Party will continue to entrench its one-party rule. It is pursuing a Singapore-model, both on the mainland and in Hong Kong, of managing two seemingly contradictory tasks: ruthlessly stamping out political dissent while opening up its economy to global trade. Singapore, with a population of 3 million, has proved the success of combining a benign but autocratic political rein with the friendly face of a capitalist economy. Hong Kong, with 7 million people, could easily follow this prescription. Whether the same formula can work with the mainland's diverse population of more than 1.3 billion will decide the future stability of China.
- "Chinese banks are still corrupt, ineptly bureaucratic and ill-managed, but can remain that way and still prosper. The government controls all of the banks and will bail them out of any problems "short of a financial meltdown."
- China's "economy is far more open to foreign investors than most believe." There will always be bureaucratic foot-dragging and red tape to make foreign investing difficult, but the very top of "Chinese officialdom" -- those "who make the final decisions" -- still "lean toward using foreign investment to jump-start a cumbersome state-dominated economy.
- Second-tier Chinese cities will reign in 2007. "China's provincial cities will be the pulse of the Chinese economy in 2007 more than the showcases of Shanghai and Beijing."
- Pollution will "darken the sky and blacken the earth." "Green-minded investors will take notice and diversify their Asian holdings from China to other developing parts of the region."
I agree with the first three, but disagree with the last two. Shanghai, in particular, will continue to boom in 2007, more so even than in 2006. SMEs [small and medium sized enterprises] and service businesses love Shanghai because it has so much infrastructure in place for them. And yes, we all know it is more expensive than the second tier cities, but what's a couple thousand dollars a month to be able to participate in such dynamism? Beijing will also do just fine in 2007 as China's center for government and media, both of which will continue to thrive. Oh, and there is this little thing called the 2008 Olympics that will play a major role in Beijing's economy as well.
China's environmental problems will lead to more investment, not less. It will lead to environmental investing and, unfortunately, to investing by those who wish to take advantage of China's lax environmental enforcement.
Please check back in a year to see who was right.
Comments (9)
Read through and enter the discussion by using the form at the endalan - January 1, 2007 7:03 AM
Agree with you on all 5 points.Chinese top officias care for earning quic money,can't wait for the local private sector to grow, and that also leads to resources concentration in sample cities ie Shanghai or Beijing;as for environment, let's forget about it.
Paul Denlinger - January 1, 2007 7:12 AM
Employment trends favor the growth of leading second-tier cities. The greatest problem, especially in Shanghai, is retaining good local talent, particularly those with 7-10 years' work experience. Demand for these people is so high that annual turnover for these manager and director level people is 20%.
When turnover among these middle management people hits this level, a company's sustainable growth becomes threatened, since it usually takes 6-9 months for any replacement hire to get up to speed and start contributing to the company's top and bottom lines.
This is why some companies are moving to cities like Hangzhou and Dalian, at least turnover is lower, and competition for middle management is less. At least until their competitors get smart and start making the same move.
China Law Blog - January 1, 2007 8:15 AM
Alan --
Thanks for checking in and thanks for agreeing with me. But don't you think much of Shanghai's growth is due to the private sector?
China Law Blog - January 1, 2007 8:17 AM
Paul --
Thanks for checking in. I agree with everything you say and I do not dispute that there will be growth in the more desirable second tier citeis. What I am saying though, is that cities like Shanghai and Beijing will continue to lead growth, despite all their issues.
Yes, there is less turnover in Dalian, but, I am also told that the people there just tend not to be as good. I am aware of companies that started in second tier cities and then had to move to Shanghai for quality reasons.
I see the mega companies going second tier, but the SMEs sticking closer to the first tier. The mega companies can import and train their own people to a much greater extent while the SMEs need to deal more with the existing hand.
Would love to hear more from you on this.
Paul Denlinger - January 1, 2007 10:31 AM
Yes, efficiency is less in second-tier cities, and the workforce is also less sophisticated, but the second-tier cities have more growth potential in terms of market size. It is always a trade-off, and each company's management has to decide what is best according to its own individual situation.
For a non-Chinese company going into China for the first time, the learning curve of locating in Shanghai is always easier, but costs are higher. Add to that it doesn't really represent China, but is a showcase city, and you get the idea. Consumer buying habits in Shanghai more closely reflect Korean, Taiwan and Japanese habits than those in the "neidi".
On the other hand, if a company is willing to go hardcore and take the plunge into really understanding and penetrating local Chinese markets, then it makes sense to go to the second-tier cities. The learning curve is very steep, and the management has to have strategic resolve and determination, but in the end, the payoff is bigger.
The market usually rewards determined pioneers which are able to adapt and learn, and have sufficient resources to hang in there for the medium-term.
China Law Blog - January 1, 2007 12:52 PM
Paul --
You have put it beautifully. I concur.
nanheyangrouchuan - January 1, 2007 3:00 PM
"Add to that it doesn't really represent China, but is a showcase city, and you get the idea. Consumer buying habits in Shanghai more closely reflect Korean, Taiwan and Japanese habits than those in the "neidi""
Well, if you want to go somewhere that really represents China you'll find yourself in Lanzhou, but there is little market potential or skilled workforce in Lanzhou.
SH and BJ will still lead growth as they also are magnets for all of the country's top talent. These people want condos, cars and starbucks NOW not in the 10 years it will take to bring each second or third tier city up to speed. And you can't really count Hangzhou's old money or Suzhou's close proximity to SH as model examples of secondary cities. And the old commie system still exists in most of the secondary cities. The gov't officials out there aren't cosmopolitan types with MBAs or grad finance degrees from the West.
Paul Denlinger - January 1, 2007 3:55 PM
The real issue in Shanghai is the high turnover among middle management, especially in sales. Among management with 7-10 years' local work experience (most companies are really not interested in haigui except in narrow technical areas; most have been away from China too long and are out of touch), the turnover is as high as 20% annually.
What does this mean for a business? It usually takes a manager or director level person 6-9 months in a new position before they can start contributing revenue to the top line. If they leave their position in a year, having been poached away by a headhunter offering them 20-30% more, then that year has been essentially wasted for that particular business. It is not a question of spending several thousand yuan more a month, it's a question of knowing when a top-line contribution can be made to the company's growth.
This is driving a good deal of the growth to the second-tier cities such as Hangzhou and Dalian. At some point, a business owner is going to say, "Why should I keep losing good people and paying high costs in Shanghai, when I can go somewhere else with lower competition, lower costs and a more stable workforce?"
China Law Blog - January 1, 2007 9:30 PM
nanheyangrouchuan --
All true.