CHINA: THE CONSUMING DESIRE - ECONOMIC PROSPECTS.

CHINA: THE CONSUMING DESIRE - ECONOMIC PROSPECTS. - With an "open door" to the West and the changed aspirations of its people, China's prospects look good.

by Kerry Stephenson.
Last Updated: 31 Aug 2010

With an "open door" to the West and the changed aspirations of its people, China's prospects look good.

On a hot, cloudless Sunday morning in midsummer, Qingdao, in northern China, could be any European seaside resort. Crowds of holidaymakers throng the pier that reaches out into a shimmering blue ocean. The sea bobs with surfers. Families and courting couples stake out sunbathing territory on the rapidly filling beach. Ice-cream kiosks and souvenir shops are doing a brisk trade with the jeans and T-shirt brigade. The sounds, too, are familiar: screaming children, scolding parents, the whine of speedboats, stall-holders shouting the odds, the roar of tour coaches as drivers fight for precious setting-down space in streets lined with illegally parked cars, nose to tail.

Qingdao, on the Shandong peninsular which juts into the Yellow Sea opposite Korea, is not just an expanding tourist Mecca. It's an industrial city of 6.7 million people. It also epitomises modern China. The dash for growth, initiated under the 'open door to the West' policies of Deng Xiaoping, is being pushed forward at breakneck speed by the Beijing leadership under premier Li Ping, and especially by senior vice-president and economics minister Zhu Rongji, who is also governor of the People's Bank.

Even today the Chinese economy is outranked only by the United States and Japan. China already has the world's biggest shipping fleet and is the world's biggest producer of coal. It recently replaced Germany as Japan's second largest trading partner. Some western forecasts suggest that per capita income will reach US$4,000 by the end of the decade. Shahid Burki, director of the World Bank's China department, thinks such predictions go too far. However, incomes could certainly match those of the Asian 'tigers' - Singapore, Hong Kong, South Korea and Taiwan - which will leave the People's Republic on course to become the world's biggest economy by 2020.

Forecasts are notoriously prone to error. In the case of China, any projection of future incomes (or of living standards or quality of life) is wide open to challenge. A society so riddled with contradictions, with a totalitarian regime plus endemic corruption and rampant nepotism, and still under the influence of Confucian philosophies quite alien to the Western mind, make prediction doubly difficult. What's beyond doubt is that this enormous country is now very much on the move; also that the prospects ahead look uncommonly good - a fact which has not gone unnoticed by the rest of the world's business community.

Certainly, the Chinese have immediate problems to overcome, such as a mushrooming budget deficit and an exploding 20% inflation rate. The government, advised by the mandarins at the World Bank, is seeking to curb the rate by drastic cuts in the money supply and by cracking down on speculation. The leaders in Beijing believe that annual growth rates of 12-13% can be sustained, but the populace has to be reminded that, beyond a certain point, personal initiative will not be tolerated. Hence the rash of much publicised executions and the sacking of 30,000 Party and government officials for theft, corruption and dereliction of duty.

Last July's crackdown on bank lending was as much a political as an economic measure, following an embarrassing leak that farmers were having to be paid in IOUs for their summer harvest. The banks, it seems, were keener on interbank loans than on providing the working capital to allow employees to be paid.

The longer-term problems are more visible. Like the fact that the vast bulk of the nation's 1.2 billion population still rank with the have-nots of the Third World. On the other hand, a high proportion of those living in the industrialised (and heavily polluted) eastern and southern provinces are quite comfortably off. The rapidly growing middle class is certainly well-off. Moreover, most urban Chinese past school age appear hell-bent on making money. The Chinese are natural traders and, these days, opportunities abound. According to Burki, between 60% and 80% of all transactions are now conducted on a market basis.

Inflation only sharpens the urge to get on. The only day of the week when commercial activity seems to pause momentarily is Sunday. Normally it's business around the clock. That applies equally on the road-building and construction sites that ring every city with a population above a million. Commuting long distances is an alien concept to the Chinese, who are well used to living in cramped city flats: a fact recognised by the planners as they decant the population out of decaying hovels and into drab estates of high-rise blocks, accommodating as many as 14,000 people each. Whole new suburbs of up to 200,000 emerge from forests of scaffolding and tower cranes after two years or less. There is a growing shortage of good-quality imported cement, and completion of power stations, airport runways and dual carriageway roads is running behind schedule. Nevertheless, the surge in building activity is evident everywhere.

Just a few years ago, personal aspirations were limited by fears of a recurrence of Mao's monstrous Cultural Revolution and the ensuing famine. All that the average Mr Wu then seemed to want was a small apartment with running water, a (preferably uninterrupted) power supply, sanitation, food on the table and reasonable access to health care. He may even have been content with his poorly paid state employment, which might one day allow him a bike and a colour television. Nowadays, many Chinese want much more: a refrigerator or mobile telephone, perhaps, modern furniture, even air-conditioning. University education for the brightest children is by no means an impossible dream.

A small car might also have a place on the list. However, middle-class Chinese living in sprawling cities like Beijing, Tianjin, Nanjing and Shanghai often have easy access to long queues of reasonably priced taxis and mini-buses. In Beijing the buses and trolley cars are supplemented by a modern subway system. Thus car ownership is not necessarily seen as a high priority, especially as the roads (in many cases being upgraded to dual carriageway) are already jam-packed. There are few places to park a vehicle anyway.

In prosperous Qingdao conspicuous consumption is reflected in the packed, mirror-glass fronted, department stores and neon-encrusted jewellery shops. But Qingdao is also different. The towering four-and five-star joint-venture hotels along the seafront, which were financed from Hong Kong, Tokyo and Taiwan, are meticulously designed to the banqueting-to-fitness-centre criteria of the major international chains. But what surprises the many Japanese and Korean visitors (who can be distinguished from the Chinese only by their language and their more expensive cameras) is the European 'feel' of the place. The building that today houses the municipal government is straight out of Baden-Baden (Qingdao was settled by the Germans in 1887). As local officials are quick to remind one: 'The architecture is the legacy of the German imperialists who constructed the city's buildings in accordance with their own national cultural traditions.' The Germans left more than their buildings, modern roads and sewerage system. They left a wine industry in the lush foot-hills of nearby Mt Tao, 1,133 metres. Down the coast, in Shanghai, their modern calling card is a Volkswagen factory that's helping to push China's car output towards the 200,000 mark. But it's the wine industry that brings Michael Jackaman, chairman of Allied-Lyons, to Qingdao on a perfect summer's day. Along with a party of UK wine shippers, he has come to see one of his company's least-visited outposts, the Huadong Wine Co, 40%-owned by Allied.

Huadong Tsingtao chardonnay and riesling are not, it's true, best sellers in the domestic market. On the whole, the Chinese prefer beer (the country's most famous beer also comes from Qingdao). They are very fond of brandy as well; indeed, they are its largest consumers. Facts such as this are of some interest to Allied, which has long been active in Japan and throughout Southeast Asia, not only with leading whisky brands like Canadian Club, Ballantines and Teachers but also with Courvoisier and Napoleon cognacs. Until now the company's sales and marketing push has been orchestrated through Hong Kong and Taiwan subsidiaries. But Allied aims to create in mainland China a much larger launching pad for bottling and marketing on the Pacific rim, to reap the benefits of lower wage and social costs - along with China's vast consumer potential.

Ice-cream represents another big opportunity. Via a joint venture with China's space agency, Allied is opening a chain of Baskins-Robbins ice-cream parlours in Beijing, which could go national if the anticipated response ensues. A joint venture with the space agency? Jackaman explains that it's all quite logical really - if you think back to the 1950s and '60s when conglomerates were in fashion. The attractions of the space agency are its sound financial underpinning and university-trained management. In any case, for a businessman such as Jackaman, the only practical way to get a foothold in the burgeoning Chinese consumer-goods market is through a joint venture with a state, provincial or municipal company. But there are obvious benefits in this arrangement. In the unlikely event that a 40% joint venture came to nothing, Allied, for example, would have to write off a minuscule sum compared with its massive investments in Europe, North America or Australasia.

China is already host to more than 170 UK joint ventures. Some other nationalities are much thicker on the ground. The stream of incoming foreign businesses has turned into a torrent, which regularly fills columns of the China Daily. It is fed, in addition, by the rush of foreign consultants, investors and advisers. The influx has caused acute shortages of office space in Beijing and Shanghai, where the hectic scramble for rooms is led by the Japanese, Hong Kong and Taiwan Chinese and Americans. Hotel rates were very low after the Tiananmen Square shootings and the subsequent tourist boycott. More recently, demand for 24-hour business-centre space with access to translators, fax and international phone connections has sent rates soaring in the top Beijing hotels such as the Grand Mandarin and Great Wall Sheraton. Demand for offices has also prompted a wave of property speculation - and of under-the-counter deals to get scarce phones and faxes connected.

Up to now the British have tended to lag in the Great China Race. In 1991 the UK's 2% share of China's imports was hardly noticeable when set beside those of Japan (33%) and the US (24%). Germany accounted for approaching 10% of the total and both France and Italy had more than 5%. In the following year Japan sold goods worth almost $12 billion to the Chinese, while the US and Germany exceeded $7 billion and $3 billion respectively. The UK, meanwhile, managed just $752 million. However, the UK figure is distorted by the fact that so many exports are routed through Hong Kong, where Britain's trade still leads that of its EC partners. And towards the end of 1993, British direct exports to China were running at almost double the level of 1990 - the previous peak year.

Through their Hong Kong subsidiaries, British companies often enjoy closer and more harmonious relations with the Beijing regime than many observers, especially those outside the business community, might imagine. Chinese government-owned trading companies, such as China Resources Holdings and Citic Pacific, are major players in the capitalist system of Hong Kong. Economics minister Zhu Rongji, who speaks fluent English, made many friends during his visits to London. There are frequent exchanges of officials between the two capitals and Hong Kong. Despite all the well-publicised differences over the fate of the Colony after its return to China in 1997, British companies and financial institutions which use Hong Kong as a gateway are almost without exception reporting higher turnover and profits. And they expect both charts to continue rising through to the late 1990s and beyond.

James Chiu, managing director of GEC (Hong Kong) - he is also chairman of the British Chamber of Commerce - has no doubt that the city will hold on to its position as principal gateway between China and the West. GEC, which employs 500 people in Hong Kong, is a significant supplier to infrastructure contracts in China, while GEC Alsthom, its Anglo-French power-engineering associate, has an important joint venture with Suzhou Switchgear Works, not far from Shanghai. Hong Kong, Chiu points out, boasts a large population of educated people who fully understand western thought processes yet know their way about China and appreciate traditional Chinese values.

Compared to the West, the Chinese attach more importance to the group and rather less to the individual. They prefer co-operation to confrontation, harmony to disagreement. For this reason, 'win-win' agreements tend to be favoured in China. The preoccupation with 'face' is not to be disregarded, Chiu advises - it is Confucianism that predominates, not Marxism. 'Both sides must emerge without losing face. If the Chinese party loses too much from a deal it will be reluctant to enter into negotiations again, depriving the British company involved of an opportunity for repeat business.' On the other hand, Chiu adds realistically, if the British company is discomfited, it may be equally unenthusiastic about further contacts.

Cultural differences alone are enough to ensure that doing business in China is seldom easy. Add to these the complex tax and accountancy systems, foreign exchange regulations, and laws that may be differently interpreted from region to region, and it will be clear that every use should be made of available sources of assistance. Hong Kong, of course, is home to innumerable Chinese-speaking Mr Fix-its, and can produce a long list of professional firms able to advise clients that wish to venture 'beyond the Wall'.

Banks such as the Hong Kong and Shanghai and Standard Chartered are obvious ports of call. The China Britain Trade Group, an advisory body subsidised by the Department of Trade and Industry, conducts missions and holds marketing seminars in association with chambers of commerce. The Group has a dynamic London secretariat, under its Mandarin-speaking executive director John Beyer. It carries out fee-based market research on behalf of individual companies. It also maintains permanent offices in Beijing, Shanghai and Guangzhou, where UK companies can set up preliminary contacts and meetings.

A few of the big British law firms are already ensconced within China itself. Clifford Chance, for example, operates out of Shanghai. However, for the time being the lawyers are allowed to ply their profession from one city only. There are many such restrictions. British officials believe that the still-yawning trade gap might be bridged if they were swept away, and if the Chinese could be persuaded to open their doors to professional and financial services, especially insurance. Nevertheless, as Li Zhongzhou, deputy director general of the Department of Trade and Economic Relations, has pointed out to foreign diplomats, there has already been a long list of reforms, including reductions in import duty, as China developed its more 'open' policies. Anomalies are still being removed, and where those in power want a deal to happen, it will happen.

Deals are rarely simple, however, and frequently take time to bring to fruition. United Biscuits was lucky at first, since its plans unfolded quite rapidly. The company's push into Southeast Asia dates from the appointment of an eight-man marketing team in 1986. Two years later, UB acquired the Pacific brand in Hong Kong, and at the same time signed a joint-venture agreement. The deal created UB (China) Ltd, 90%-owned by United Biscuits - the minority being held by a company called Hai Wan Village Enterprises. A 7,500 square-metre factory was built on reclaimed land at Shekou, part of Shenzhen's SEZ (Special Economic Zone) at a cost of US$18 million, and a team was sent out from the UK to train management and staff up to group standards. The new company produced its first biscuits 15 months after the signing of the agreement, on new plant supplied by APV Baker. It currently employs 500 people - and capacity is being increased from 11,000 up to 20,000 tonnes.

Nevertheless, success has not been easy, as UB's development director, Derek Hayes, told a China Britain Trade Group workshop. There have been successive misunderstandings. Making artificial deadlines can cause management to lose face, which is detrimental to morale. The Chinese won't be hurried, Hayes warns. 'Non-availability on the Chinese side can mean that they do not wish to move on.' If things are going slowly consider two possibilities, he advises: (a) they do not agree but have not found an acceptable way of saying so; (b) they may not understand something - possibly quite trivial - but do not like to admit it. 'Negotiations can at first be frustrating,' says Hayes. But the Chinese expect to establish a relationship, not just to conclude a quick deal. This can be 'a source of strength in the long term'.

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