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Though we’ve been to China many times, we are always
surprised by the changes, the politics, and the endless creativity
of the Chinese people. We recently returned from an
18 day trip to China with a small group of friends who have
travelled with us before. We hope you enjoy this summary
of what we saw and learned.
Our trip started in Beijing and continued on to Xian, Chengdu,
Lijiang, Chongqing, a cruise on the Yangtze, and Shanghai.
In and around Beijing
In Beijing, we were able to tour the incredible Olympic
complex China built for the 2008 Summer Olympics. The
various facilities are a tribute to the skill and imagination
of the world class architects who designed them. Tiananmen
Square reflects China’s
pride in its Olympic accomplishments, with a huge screen
showing videos memorializing the magnificent Olympic opening
ceremony.
For the first time, we toured the Great Hall of the People,
where President Nixon was feted during his visit to China
in 1972, opening the country once again to American travel
and business. It is quite sumptuous, with lovely artwork
and grand banquet rooms. This may be the largest building
of its kind we have ever seen. We were told it was
constructed in less than 6 months.
We have watched the enormous CCTV (China Central TV) tower
and complex being built over the last 3 years. Part of the
complex is a Mandarin Oriental Hotel, which burned just before
it was to open, as a result of a fireworks display gone terribly
awry. It
is a ruin now,
and the government doesn’t know what to do about it
because demolishing it might compromise the foundation of
the CCTV tower itself. Beijingers hate the whole complex,
so are not unhappy at the dilemma. They say that CCTV
tells only lies on its news and other programs, so deserves
to be punished. They claim that CCTV stole the Olympic
fireworks to use during the Chinese New Year. So far,
the fire insurance company refuses to pay on the fire policy
because they say CCTV caused the fire with its fireworks.
Meeting with Goldman Sachs
We met with the General Manager of Goldman Sachs office
in Beijing, John Zhang, and the head of their Equities Division,
Dongjie Wang, PhD. Under Chinese law, a foreign investment
bank can do underwriting, but not secondary securities sales. They
told us that most Chinese pay cash for cars, but that General
Motors and Volkswagen are setting up finance companies to
begin financing auto sales.
Their projection is for 11.9% growth in China in 2010 vs.
2.7% to 3% for the U.S. China may exit from its stimulus
package in early 2010. They said that provincial resources
are limited, that money comes primarily from the central
government. Although there is both private and public
investment in China’s assets, at the bottom of it,
the government owns most of the assets.
Most of the IPO’s are by big state-owned enterprises. The
state must own 51% of the companies, but usually owns closer
to 75%, with the remaining 25% in private hands. The
government must always approve the “grand plans” of
a state-owned enterprise and plays a big role in whether
an IPO can happen at all. IPO’s in China operate
like auctions. Relationships are key to who wins an
auction. Asset ownership is always complicated, so
due diligence is a big and important process.
Employee stock ownership plans are now disapproved because
if employees get rich on an IPO, other Chinese citizens will
ask why employees of a state-owned enterprise should get
rich when the state owns the company.
The Shenzhen stock exchange now has a NASDAQ-style market
for small companies, the Growth Enterprise Market. Its
goal is to help entrepreneurs get funding. These are
truly private, John Zhang told us.
The National Development and Reform Committee is like the
old Soviet central planning commission. It doesn’t
work well, but is responsible for planning public infrastructure. It
rejects lots of projects.
Chinese growth is stimulating growth throughout Asia, particularly
in resource-rich countries. This will help return
the global economy to “normal”. To sustain
its growth, China is improving its health care system, improving
farm aid by eliminating its agricultural tax, and building
a social safety net for farmers.
Returning factory workers are taking their new skills back
to smaller cities and villages (small cities in China are
5 million people) to be closer to their villages. Farmers
can now lease land to others. The 1978 reforms cut
land into small pieces and let farmers determine what they
wanted to grow. Now, you can farm yourself or sublet
your land to others. This is creating land consolidation
and economies of scale. 50% of Chinese are still farmers.
All property is owned by the government. Leases are
for 70 years for land and homes. Many farmers are dumping
their land in order to work in the cities. The Chinese
legal system is very Confucian-based—not clear cut. The
judicial system is part of the government, not a separate
branch as in the US. Nonetheless, there is an attempt
now to codify the law, with international norms beginning
to take hold, particularly in transparency. Disputes
involving foreigners are often resolved more fairly than
internal disputes.
Meeting with Paul Taylor, U.S. Commercial Service
Our next visit in Beijing was with Paul Taylor, a long-time
friend of ours who formerly ran Denver’s China Trade
Office in Shanghai. He is now a commercial officer
at the U.S. Embassy in Beijing. We met him in the new
U.S. Embassy, which is a very secure fortress, very unlike
the old, insecure embassy. The buildings were built
by American workers exclusively in order to ensure there
were no bugs implanted during the construction process (you
may remember the need to abandon the new U.S. Embassy in
Russia a number of years ago because of bugs implanted everywhere
by Russian construction workers). Only cleared Americans
can enter the complex and, within the complex, there are
varying levels of security.
Recent trade talks made progress for U.S. exports to China,
including rescinding the Chinese ban on American pork products
and the Chinese requirements for local content on wind energy
products.
Paul was in Urumqi recently, the center of the Uigher uprising
against Chinese control in Xinjiang Province (where we have
visited twice). In his hotel, there were no tourists
at all, only riot police. The entire region remains
very tense.
Because of the unrest in the West, China’s National
Day, October 1, was very secure. Even people who live
in downtown Beijing were not allowed to watch the parade. They
couldn’t go out on their balconies overlooking Chang
An Street, Beijing’s main thoroughfare. China
is very sensitive about its minority problems. People
with diplomatic passports cannot go to Tibet, for example. Tourists
can go with a permit, however.
Chinese don’t have much confidence in their social
system. Farmers have no health care and no health insurance. That
results in a very high savings rate, about 50%, to protect
themselves in case of illness and to provide money for their
retirement. Chinese safety nets are savings accounts and
children, but with only 1 child allowed for most Chinese,
that is a shaky safety net.
China’s exports are way down now reflecting the global
recession and the large dependence upon U.S. and European
markets to purchase Chinese manufactured goods. They
are trying to diversify their international markets away
from just the U.S. and Europe. The stimulus included
the development of a more sustainable health care system. Urban
employees have employer/employee financed health care.
Much of the stimulus was in the form of loans, made by state-owned
banks. Banking is opening up a lot in China, mostly
on the retail side, with Hang Seng Bank, HSBC and Citi playing
active roles now in China.
The government’s overriding concern is social order. Technology
provides the capability to disrupt society. The government
sees the internet as a big problem. Previously, you
needed a license just to send a fax. Now China has
banned Facebook, You Tube, and Twitter, creating the “Great
Firewall”, a network of people and software to filter
all internet information and access. Data pipes are
limited and are all owned by the government, so sites can
easily be blocked. Twitter, for example, runs through
U.S. servers, which China can block. They would prefer
to block specific content rather than entire sites, but they’re
far away from being technology innovators.
The software development industry is a time and materials
industry in China. New technology isn’t developed
here. Consequently, they have little respect for intellectual
property and don’t understand its value. Historically,
great art was created by following the style of someone else
who went before. Tradition places little value on personal
innovation in any sphere.
Chinese are beginning to see individuality as important. There
is more respect for individual thinking and behavior than
in Japan. But, they don’t see stealing IP as
wrong since they don’t do much research and development. The
government controls the university system tightly, with any
new technology going to the state owned enterprises. The
quality of American technology and engineering graduates
is vastly superior to Chinese graduates, except for a couple
of universities. That makes it very hard for Western
companies to find qualified tech graduates.
Xian
Xian’s vast array of terracotta soldiers is the primary
tourist attraction in Xian, but there is much more. The
wall has been restored and offers a great walk around the
oldest part of the city—13
km—or a bicycle ride on rickety old bikes for rent
at the top of the stairs. We were late, so walked
on part of the wall, watching workers demolish old buildings
and sort the timber and bricks for future use.
The Wild Goose Pagoda, very bedraggled in a weedy field
on our first visit in 1987, has been fully restored, with
a number of temples and pretty gardens surrounding it. The
Pagoda also has an art school, with a group of very good
artists who sell their paintings to support the monks who
live in the Buddhist Pagoda complex. Everyone bought
paintings, some quite large, and all really beautiful. We
were able to watch a demonstration of Chinese calligraphy
before we shopped.
Chengdu
From Xian, we flew to Chengdu, and headed off to visit the
Dongjianguan Water Project, an ingenious 2000 year old irrigation
and flood control project outside Chengdu. It was
right near the epicenter of the frightful 2008 earthquake. Many
of its schools and buildings collapsed in the quake killing
tens of thousands of people and so many children. We
drove through the ruined city, partly cleared, with a number
of new buildings the government has built to house people. The
hotel where we ate lunch a little over a year ago was only
a pile of rubble. We were there 4 weeks before the
quake hit. Very sobering.
A visit to the Panda Breeding Center is a highlight of any
visit to Chengdu. We saw several babies and young pandas
lolling in the trees and munching bamboo shoots among the
two dozen red and giant pandas we saw.
Visit to Intel, Chengdu
Chengdu is becoming a large manufacturing center in Western
China, motivated by the central government’s policy
of providing incentives to develop the interior. The
infrastructure is excellent and the workforce hard-working
and well-trained. Intel is moving its Shanghai manufacturing
operation to Chengdu where labor is cheaper and roads are
less congested. From our other trips, this confirms
what we have heard and seen about the emphasis on development
of China’s interior regions.
We met with Mike Mendenhall, the general manager of Intel’s
Chengdu facility, a fascinating man who has studied Daoist
philosophy for 30 years, thoroughly enjoys living in Chengdu,
and knows everyone in the local government who can help Intel
be successful. Though he has just returned to the U.S.
after 3 years in Chengdu, he plans to buy a house there and
visit often.
Mike was very involved in helping the area recover right
after the 2008 earthquake. Within weeks, Intel Chairman,
Craig Barrett, arrived to visit the collapsed towns and schools. They
started an I-world program to provide internet access to
new schools, with e-classrooms all wired for internet access
and fully stocked with computers. So far, they have
created 200 I-world schools, spending $5 million to date. Employees
have volunteered 70,000 hours, an effort which really brought
them together as a team.
Intel deals with IP theft by rigorous training. It
is a problem that is very hard to deal with in the Chinese
culture. The first 6 months is all training, then
each employee gets 1 day per month of training.
80% of the products produced in Chengdu stay in China. This
is a very important statistic and perhaps is the key to China’s
future—domestic consumption. As Chinese consume
more, the Chinese manufacturing juggernaut will become more
diversified between exports and internal consumption, which
will greatly benefit their economy.
Because their factory is located in an export zone, they
must export their products, so do a “Hong Kong U-turn”,
sending their products to Hong Kong and immediately back
to factories in Shanghai and the Pearl River Delta. They
have a very good working relationship with Chinese customs,
Mike told us. Shipments in the Hong Kong U-turn are
mostly by air. Intel can’t fabricate the highest/newest
technology in China because of U.S. restrictions on tech
transfer, but can import and sell the newest technology in
China.
The turnaround time for production is now 7 days, down from
21 days three years ago. During the first half of 2009,
Intel’s exports were 60% of Szechuan’s exports
out of China on a dollar basis. They try to work very
respectfully with the government. They make no demands,
but try to partner with them. Intel has never had a
joint venture in China. They “just say no” to
corruption and have never had a problem. Personal
relationships are so important—the government officials
in the city and province are close friends of Mike’s.
Institute of Care-Life
Chengdu Mei Huan Tech Co., Ltd.
Meeting with Tun Wang, Ph.D., CEO
www.huanla.com
Dr. Tun Wang has a Ph.D. in mathematics from the University
of Connecticut and a Ph.D. in physics from the China Academy
of Sciences. He was working on a post-doctorate in
theoretical physics in Austria when the 2008 earthquake demolished
so much of his home province. He returned to Chengdu
to try to save lives by studying earthquakes.
He told us that earthquake waves move 3 – 6 km per
second. He has developed a device for homes and schools
that will give people 50 seconds warning before the wave
strikes their buildings. He is using wireless networks
to suppress false alarms and has patented the technology
to do that. His collaborator is a professor at MIT
and his funding comes primarily from U.S. universities and
private contributions from friends. Within 6 days of
the May 12, 2008 earthquake, Dr. Wang had raised about $750,000
for his research. His goal is to have no more than
1 false alarm in 1000 years. He is keeping all the
IP software in China to protect it. Two of his systems
are already in schools and he expects more orders soon.
Lijiang
Lijiang is on the edge of the Tibetan Plateau, with Jade
Dragon Snow Mountain, part of the Himalayas, rising a spectacular
18,000 feet above it. We have been as high as 15,000
feet on Snow Mountain, but, since that tram was closed, we
visited a different, and much more enjoyable, part of the
mountain, taking a walk through forests and meadows with
gorgeous views of the mountain. The crowds quickly diminished
as we walked farther from the gondola that takes you to 12,000
feet.
On our return to Lijiang, we stopped for lunch at a Tibetan
village, with typical Tibetan houses and, of course, crafts
and art for sale. The Old City of Lijiang is 700 years
old, with narrow alleyways and old wooden houses with stone
roofs packed tightly together. It is a city of small
canals that carry water along most of the streets, providing
water for all domestic uses and for firefighters when the
frequent fires occur. Today, Lijiang is a busy tourist
center, attracting millions of Chinese each year. It
is surrounded by high hills and mountains, with myriad old
temples and pagodas on their slopes and summits.
We visited a beautiful old home, with a series of temples
and mansions inside its high walls and the lovely Black Dragon
Pool Park, with wonderful views across
a lake to Snow Mountain. To fly in and out of Lijiang,
you swoop into a long, narrow valley, much like Aspen, and
have to circle twice inside the valley to get into or out
of it between the mountain ranges.
Chongqing
Chongqing is the largest city in the world, encompassing
a 300 mile long stretch of land and 32 million people. Before
boarding our superb boat, the Yangtze Explorer, for our 3
day cruise on the Yangtze River, down to the Three Gorges
Dam, we spent a day in Chongqing. The city has recently
opened a wonderful museum, the Three Gorges Museum, with
excellent displays of Yangtze River cultures throughout the
last several millennia, as well as beautiful paintings by
Chinese artists.
Chongqing was Chang Kai-shek’s headquarters during
the Second World War and the Chinese Civil War. Because
it is usually foggy, it was harder for the Japanese to bomb,
though bomb they did every time they got the chance. The
U.S. sent General Stilwell to advise Chang Kai-shek and oversee
American operations in China. We visited Stilwell’s
home/office, high above the Jialing River, and the Flying
Tiger Museum just across the road.
We must have seen 20 cranes filling the near skyline along
the Jialing River, as Chongqing is booming with new construction. Like
all Chinese cities, it is very polluted, made worse by the
constant fog.
Cruising the Yangtze
The Yangtze River is 4000 km long and travels only through
China. It is the third longest river in the world,
after the Amazon and Nile, starting at 16,542’ on the
Tibetan Plateau. There are 500 million people living
in the huge Yangtze Basin.
The Three Gorges Dam, the largest hydroelectric dam in the
world, produces less than 3% of China’s power and will
produce about 1% by 2020. China is dependent on coal
for 70% of its power. Construction of the dam began
in 1994. Because of the dam, the most recent flood
in 2007 caused no deaths, whereas earlier floods would often
kill thousands of people living along the river. A
1998 flood killed 3000 people, caused $25 billion in damage,
and left 14 million people homeless. In the 1931 flood,
somewhere between 3 and 4 million people died.
The Dam is 1.4 miles long, the same as the Golden Gate Bridge,
and nearly 600 feet high. Over 40,000 construction
workers built the dam, working around the clock. The
government had to relocate 1.4 million people to new villages
high above the new reservoir. Of the $28 billion cost
of the dam, ¼ went to relocating people and villages. Today,
the dam has 26 turbines and will soon have 6 more.
We went through the huge ship locks on our third night on
the cruise. It
was eerie in the nighttime glow of yellow lights illuminating
the locks. We entered the lock first and were followed
by another cruise boat and 2 barges filled with sand. We
went through 3 locks in all. A new elevator ship lock
is under construction, which will reduce the time for traversing
the locks from 3 ½ hours to 45 minutes for smaller
ships. However, this lock will cost ship owners whereas
the current 5 locks are free of charge.
Sun Yat-sen first envisioned a Three Gorges Dam in 1919
and Chang Kai-shek actually started construction farther
up the river. The Japanese moved the dam to its present
site. Today, commercial traffic is 4 times greater
than before the dam was built. However, it is causing
significant environmental damage and losses of fish.
For a thousand years, members of the Tu Jai minority group
were the boat haulers who hauled boats up the river through
the Three Gorges. Sometimes as many as 300 men hauled
the boats, using giant ropes. They were naked because
of the heat and suffered huge sores from the rubbing of the
ropes on their skin. These former boat haulers now
mostly live in cities along the River.
One of our excursions during the cruise was to a village
that had been moved high up the steep mountainside as part
of the relocation effort. We went to the home of a
woman whose family had moved, quite happily, from their old
mud home and tiny farm in the valley. She told us that
the money the government paid them for their old house and
fields gave them enough cash to build a house and shop in
the new village (which is anything but a village, being a
small city). Not everyone would agree with her. There
were many unhappy villagers. The woman we met said
their compensation was 80,000 yuan (about $11,000), enough
for them to build the shop and home they wanted.
This woman has a 4 bedroom home above her shop. The
bedrooms are on both sides of a good-sized living room. Each
of her three sons has a bedroom with his wife and she and
her husband share the fourth. There is a balcony where
the family has a washer and dryer and a tiny toilet enclosure
that also serves as a shower. They cook and eat in
the shop. She told us that the shop covers all their
household expenses, but obviously they are more prosperous
than that, by Chinese standards. Her son and daughter-in-law
own a restaurant and she takes care of her grandsons (in
one child China, the parents had to pay an 8000 yuan fine
for having a second child—about $1100) while they are
at work. She said the restaurant is very popular. It
grosses about 100,000 yuan and nets 7000 yuan (about $1000)
a month, a large amount of money for a Chinese family.
Next we visited a farm family in a traditional house. It
was very neat, but built of mud bricks with a mud floor. The
toilet was a hole outside. We watched as the man of
the family hauled human waste in 2 large buckets slung on
a pole over his shoulder to fertilize his small field of
vegetables. The house has 3 rooms, a living room with
a couple of chairs and a refrigerator still wrapped in the
plastic it was shipped in, a bedroom and a kitchen. It
was all very dark and dank. A small opening in the
ceiling of the living room was covered with a piece of glass
and provided the light. The house smelled of human
and animal waste. This family was surely better off
than their neighbors because they received money from the
cruise companies for letting tourists see their house. But
their lives were still very impoverished and difficult.
We also visited a local market, sprawled along about a dozen
streets, and featuring everything imaginable from tires to
shoes to exotic (to us) food.
The new villages are comprised mostly of multi-story apartment
buildings. In China, buildings of 6 floors or less
have no elevators. The new buildings along the Yangtze
have no heat or air conditioning, in a climate that has extreme
heat and cold. Individual families must provide their
own air conditioners and heaters, but few do.
The area along the Yangtze is the poorest in China. Many
areas still have no roads. Villagers use foot paths
through the steep mountains and gorges and boats if they
can afford them. There continues to be a huge amount
of construction all along the Yangtze, including roads, bridges,
buildings, and new cities.
As we left the Yangtze, we headed to the airport at Yaching
to fly to Shanghai. We had lunch at a restaurant overhanging
another gorge that feeds into the Yangtze. Only after
we left did we realize that we had been overhanging the gorge,
high up on the cliff.
Brian Kwok, our good friend and travel agent in China, finagled
suites for all of us on the boat, so we traveled in luxury,
especially compared to our last cruise on the Yangtze, which
was on a dirty, depressing Chinese boat with teeny, grubby
cabins. The
food and service were wonderful. We enjoyed the cruise
immensely this time around.
Shanghai
Our only business visit in Shanghai was an all day meeting
with Global Logistic Properties, the company that bought
Denver’s ProLogis China business, and a tour of Shanghai’s
enormous new port. We met with Ming Mei, President
of GLP, Kent Yang, Managing Director of GLP, and Richard
Xia, General Manager, GLP Lingang (GLP’s Shanghai port
facilities). All are young, went to U.S. universities
and are very familiar with the U.S. economy and culture. They
speak perfect English and fully understand the global marketplace.
ProLogis is still the largest industrial real estate owner
in the world. They entered China in 2004 in Suzhou
and Shanghai, and built 34 million square feet of warehouse
space in China. ProLogis sold their China business
to a Singapore government investment corporation (sovereign
wealth fund) in a deal led by Ming Mei and Jeff Schwartz
(former CEO of ProLogis).
The properties are 99% leased. Demand in China is
beginning to come back now. GLP is the only provider
of such intensive and high quality warehouse facilities in
the most important markets in China. Under their new
strategy, they co-market with customers who endorse GLP’s
facilities. For example, they will be co-marketing
with KFC, paying all the marketing costs and getting KFC’s
business and endorsement in return.
Logistics are often 90% of product costs. As a result,
companies try to cluster their parts, distribution and manufacturing
operations together to save on transportation costs. GLP
works with companies to plan their logistics and build the
facility that will optimize their logistics. In the
second quarter of 2009, leasing increased 340% over the first
quarter. GLP does spec buildings, build-to-suit, and
sale-leasebacks. In 2010, they expect to develop over
10 million square feet of warehouse space. Their big
focus now is growing the local customer base. Entrepreneurial
businesses are now the fastest growing sector of the Chinese
economy.
Government policy affects GLP’s plans. In the
process of creating a national safety net, the government
will require that 10% of any IPO proceeds go to the national
social security fund. All gambling related profits
also go to the SSF as will 5% of all profits of state owned
enterprises.
The new generation of urban Chinese professionals are more
American than Chinese in their world outlook. They
are spending all they earn. But rural Chinese live
in poverty and have no social safety net. They know
what they don’t have and don’t like it. Consequently,
China’s government is terrified of social unrest. Chinese
governments have always been overthrown internally, and that
has happened when people have had no hope for themselves
or their children. So, the government plays to the
populace, subsidizing education in rural areas, health care
for all, etc. While farmers have no health care right
now, it will soon be free to help compensate them for having
no pension.
We went from GLP’s offices to the new Shanghai port,
traversing a 32 km. bridge that spans the shallow sea to
the deep water port. The sea has dozens of wind turbines. The
port is huge and very modern, but quite a long way from Shanghai. Nonetheless,
the infrastructure is excellent at the port and from the
port to the city.
Shanghai also continues to grow rapidly. It is preparing
now for its World Expo in 2010, completely renovating its
beautiful and famous Bund, updating its parks and gardens,
spiffing up old buildings, improving infrastructure. It
hopes to outdo Beijing’s preparations for the 2008
Olympics.
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