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It Was 60 Years Ago Today! Reflections on Change in China

By Laurence E. Lipsher - Email Editor

Dear Valued Reader,

t was fitting to be in China for the first National Day parade in a decade. I was in Beijing for the 50th anniversary parade in 1999 and wrote about it - one of my first nontax articles to be published. A laughing People's Liberation Army soldier was airbrushed out for publication from a picture of me standing in front of a scud missile launcher complete with whitewall tires. At that time, it was still a crime to show pictures of military personnel, and the local censor would not accept the picture for publication in China without the soldier's "removal."

Approximately a year and a half later, despite many warnings, I moved to China. There wasn't a parade in 1989, for obvious reasons. A fiftieth anniversary parade in 1999 was understandable, but prior to the world finding itself in its current economic upheaval, I do not think for one moment that any of China's economic or social planners had even considered a sixtieth anniversary parade. However, a feel-good event of this magnitude is a proven remedy when things are not going as well as you'd like them to go.

Mao Zedong was no angel. Tens of millions of Chinese died, needlessly, because of both the Great Leap Forward and the Cultural Revolution. Mao was in a position to mitigate the harshness of both "events" yet did nothing and, because of this, deserves blame. Yet Mao is regarded as God-like, even by those who suffered as a result of both his actions and, at times, intentional inaction, because he made the Chinese people feel proud to be who they are; he united the country and its people after centuries of humiliation. The true horror stories may never be written; those who suffered the most were the people who remained in China immediately after the Cultural Revolution. Chinese culture seems to sweep unpleasant history under the rug, with the result being virtually no knowledge of the past by the subsequent generations. My wife, a child of the Cultural Revolution, was entirely unaware of the plight of her own parents, both academicians, who suffered unbearably while China was closed during this period of social upheaval.

The sixtieth anniversary parade was specifically planned for television viewing. While the fiftieth anniversary parade did not utilize overhead cameras, this parade did so, creating spectacular visuals viewable worldwide. Chinese officials will surely add teleprompters for the next parade, as President Hu Jintao's speech, written on paper, blew in the wind, nearly flying off the podium from which he delivered the address. Much like the fiftieth anniversary parade, this one was criticized as being "exclusive," with a Financial Times September 29, 2009, article headline stating: "Public not welcome at Beijing's party," and then going on to note the furor that would ensue "if all but a few handpicked commoners were forbidden from central London while British nobility attended a royal pageant or if the citizens of New York were barred from attending the Macy's Thanksgiving Day parade."

As usual, it's not quite that simple. In answer to this, I can only comment based on my personal observations from a decade ago, contrasting them with this parade. The logistical operations, planning, and implementation required to move 500,000 people quickly into-and out of-a small space within a short period of time are mind-boggling. The Macy's Thanksgiving Day parade is truly small in comparison. I am told, though, that there were fewer sanitary facilities available this time (according to the People's Daily, only 4,000 portable toilets were brought in at 2 A.M. on October 1, only to be removed by midnight) and that adult disposable diapers were widely distributed.

And yet, this parade a decade later, in the midst of a worldwide financial crisis, a televised spectacle seen around the world, was a clear reminder that China is not to be taken lightly in the world economy. The fiftieth and sixtieth anniversary parades offer a lens both to view the past and reflect on the future. The next decade, beginning in 2010, the year of my own twentieth anniversary of living in China, promises "interesting times" for China and its global trading partners. What is on the minds of the Chinese people? What are possible remedies to the current - and future - problems? I'll group the concerns that I believe are most important into eight categories, all beginning with the letter C - as in China.
A Critique of "C's"

Consumption

A few years ago, China, which operates under five-year economic plans, announced a different, rather bold eleventh national five-year plan. It was actually socialist in concept - something that had never happened before. The government, in all probability, had absolutely no premonitions of an imminent worldwide financial crash and felt that its export-driven economic model would work indefinitely. Yet the eleventh five-year plan aspired to turn China from a nation of savers into a nation of consumers, of spenders. To boldly go where no Chinese government had ever gone before, at least in the post-Mao era, the government announced that it was going to take on the task of covering education costs, medical expenses, and old-age assurance, all things that had disappeared with the demise of the Iron Rice Bowl.

The Chinese are savers. They save close to half of their income because they have to pay for their child's education; because if they get sick, they have to cover the cost of getting well; and because there is, effectively, no social security system to see them through retirement. Last year, private consumption shrank to 35% of the gross domestic product (GDP). Simultaneously, investment, and that includes personal savings, rose to 44%. That may all be perfectly fine in a robust world economy, but without that export-driven economic engine, where there is even less money available when making a choice as to how to allocate income, money will be saved and not spent.

The Chinese people save out of habit. Only when it is proved to them that the government is really going to spend money on countrywide, quality education; that hospitals and clinics will treat local citizenry without bankrupting them; and that all seniors will have a retirement income permitting them to survive will they begin spending on themselves instead of putting cash away to cover their basic educational, medical, and retirement needs. Such a change in attitudes takes time-a lot of time by impatient Western standards. Yet one or two generations is not even a blip on the radar screen of Chinese civilization, and that is what it is going to take for such a change to take hold. For those who are going to be around 50 years from now, take note: China is very likely to be a nation of consumers. It is what transpires while getting to that point that will be interesting.

Citification

Let's take a brief look at the basic, fundamental problem confronting China: there are 700 million people living in the countryside, in rural China. That countryside can, at best, support 300 million people. Thus, over the next half-century, China has got to not only grow its current cities to take in the substantial influx from the countryside to the city, but also start new cities. If anyone can do it, China can.

Although you have probably heard of Shenzhen, it is unlikely that you have visited that city either recently or in the 1980s, when I was there and Shenzhen had a population of just 350,000. Barely a quarter-century ago, traveling the narrow road between Shenzhen and Shekou right after a rainstorm was a four-hour journey. With the completed subway line, that trip will take 10 minutes. Shenzhen is now a city of 12 million people. In a generation's time, Shenzhen grew from next to nothing to a booming metropolis, due to some great tax incentives that brought in industry, which then hired migrant laborers who effectively supported their families in rural China. There's absolutely no reason why that feat cannot be replicated again. Frankly, it is a feat that must be replicated over the next half-century - and not just once!

Shenzhen was one of the original seven Special Economic Zones (SEZs). If you include Pudong along with the seven original Special Economic Zones, then upon analysis, you can conclude that four zones worked and four really never developed. I think that there will be four tax incentive - loaded new zones that China will concentrate on over the next decade, one of which is already in existence and one of which has recently been announced. Each of these four zones, in fact, must absorb 25 million rural dwellers while other cities throughout the country must draw an additional 100 million rural residents if China is to develop from what is, in essence, a third-world country. Although you may have visited Shanghai or Beijing, both great cities, they are not truly representative of the rest of China.

The Binhai New Development Zone was announced two years ago. It is headquartered in Tianjin, a city that is currently reinventing itself into a very dynamic commercial center. The central government is taking direct responsibility for development of this zone, which is going to serve as a gateway to the northeast rustbelt of China. Shenyang and Harbin, while not in the Binhai zone, will be directly serviced by that zone and are going to be beneficiaries. Traveling from the port city of Tianjin, located on Bohai Bay, to Beijing used to require a half-day trip. That journey now takes just a half-hour with the new, high-speed rail system that is in place and functioning smoothly.

There is a brand-new economic development zone west of the Taiwan Straits - the Haixi Economic Development Zone, geographically centered in Fujian Province (closest to Taiwan), which is being set up as an experimental zone by the State Council to include new, "comprehensive reforms" (according to the State Council; what the comprehensive reforms are has not yet been detailed) as a platform for expanding and improving trade relations across the straits. The central government, in a May 24, 2009, article in the China Daily, announced that it will adopt preferential treatment of fiscal, tax, and industrial policies in the areas of scientific research, technical services, leasing, outsourcing, and offshoring. Beware, India - China is soon going to be competition for you in this area. What can corporate India do, though? Indian corporations could conceivably start their own offshoring entities in Haixi, since there is absolutely nothing to prevent them from doing this.

Guangdong Province is also very much involved in this new zone. If you look at the boundary lines of the Haixi zone, you will see that northeast Guangdong Province lies within Haixi. Shantou, one of the "failed" SEZs, is located in this new zone. So is Chaozhou, the ancestral home of Li Ka-shing, the wealthiest ethnic Chinese businessman in the world. It is not unrealistic to think that the Chaozhou area was specifically included to take advantage of Li's investment potential. It is also a good assumption that Li's investment will be made via a Barbados offshore corporation. Though the rumor is unsubstantiated, it is widely believed in financial circles that all of Li's China investments are held through Barbados offshore incorporations. Why? Because Barbados has the best legal avoidance mechanisms in place regarding the capital gains tax.

While they haven't been announced, I feel confident in predicting two additional economic development zones in the future, places where the Shenzhens of the future are likely to develop-one in the southwest/ central region of China, accessible to both Chengdu and Chongqing (where a new airport is being built with four runways to be operational at inception), and one in the northeast. The southwest/central zone will also be serviced by roadways linking to the coast, off the South China Sea, across from Hainan, where a massive, new deep-water seaport is currently under construction. Thus, this zone will be more export-oriented, with both air and sea transport accessibility for export, more so to Africa in the future. The northeast zone is a bit of a problem for China. It is sorely needed, but nothing will happen while there is ethnic unrest in both Xinjiang and Tibet. And yet, Lanzhou, the capital of Gansu Province, just might be an "alternative" for consideration, if for no other reason than that both President Hu Jin Tao and Premier WenJiabao both did their training in Lanzhou approximately 30 years ago.

There are also alternatives to economic development zones. Guangdong Province, which has prospered far more than the other provinces of the country because of the SEZs, announced at the end of July 2009 a project to be developed jointly by Guangzhou - my hometown - and Singapore. Also in July 2009, the Singapore Business Times reported that SingBridge International, a Temasek subsidiary, and the Chinese government completed a feasibility study in just 90 days for the joint Sino-Singapore development of a knowledge city in Guangzhou. How times change. The first feasibility study that I participated in, in 1990, at a very low level, took a year to develop.

Initial plans envisioned a 50-square-kilometer zone in the north quadrant of the Guangzhou Development District. This must really be a good program, because the official announcement now calls for not only an increase in size to a 123-square-kilometer zone, but also includes complete ease and accessibility for transportation by government- built rail lines to Guangzhou's Baiyun Airport. It also calls for a municipally financed extension of the Guangzhou Metro subway system to this territory, which, by the way, calls for a subway station to be built less than a quarter of a mile away from our home in Guangzhou, reducing the time it currently takes to get to this district from 45 minutes by bus to less than 10 minutes by subway. As a supporter of public transportation, I am discouraged by the thought that China's economic planners are unlikely to discourage automobile ownership in favor of bus and rail transport. What I find particularly intriguing about the north quadrant area is its location practically next door to the Japanese automobile industry in China. This just might be the area where an alternative to the internal combustion engine could be developed.

Credit (and Banking)

In a September 2009 article in the Singapore Business Times, Minxin Pei of the Carnegie Endowment for International Peace of Washington, D.C., stated that he could not picture the Communist Party of China permitting significantly more financial competition. He said, "This is where the government makes its money and maintains its political patronage system. I do not believe the Communist Party will be foolish enough to let somebody else eat this piece of juicy meat."

As someone who has lived - and made a living - in China for more than two decades, I could not disagree more with Minxin Pei's assessment of China's banking future. Without any hesitation, I predict that ten years from now, the big four banks of China will not be the same banks that exist today (Bank of China, Industrial and Commercial Bank of China, Agricultural Bank of China, and China Construction Bank).

First and foremost, my reasons for this belief are rooted in the fact that banks in China currently have no incentive to lend to small and medium-sized enterprises (SMEs), most of which are privately owned. These SMEs also happen to employ more than 75% of the urban job market. Job creation is the key to economic prosperity- universally. China needs to create 25 million new jobs each year. These positions will not come from stateowned enterprises - they will come from small entities that grow and hire. These new entities will never get the necessary funding from the current banking structure in China. Thus, my sense of the future is that as much as the Party would like to control that big, bold, banking tiger, they don't even have a firm grip on that tiger's tail.

Second, the bureaucratic structure and banking philosophy of the big banks in China is outmoded, corrupt, and, quite simply, way behind the times. While the Party might not recognize this, I think that the China Bank Regulatory Commission (CBRC) does understand this.

Third, the major players in the banking game - primarily operating in Hong Kong and secondarily in Singapore - understand the nuances necessary to do what has to be done without being tied into a vast bureaucratic structure. They are waiting patiently to enter the China market and they will do so successfully.

Fourth, and perhaps most important, there is already a micro-finance revolution taking place in China, with regional players developing at a brisk pace. These entities will find it easier to upgrade themselves into full service banks than the big banks, which will have to adapt by downsizing their business practices to fit the financing needs of the future by catering to both SMEs and the smaller, not-quite-yet businesses, those not even at the SME stage of development. It seems quite likely that one or two of these smaller, currently "not-quite-a-bank" organizations will be banking giants a decade from now.

Cars

I grew up watching The Dinah Shore Show on television. Shore was a popular big band vocalist who made the successful transition from radio to television, sponsored by Chevrolet, the lowest-priced automobile brand offered by General Motors at a time when anyone saying that 60 years from then GM would go bankrupt would have been considered crazy.

The show's hit song, "See the USA in Your Chevrolet," helped make the Chevy the most successful automobile brand in the world. As the U.S. highway system expanded, so did related services needed by the automobile owner. These are services that are simply nonexistent in China at this time. These are the services that will be successful in the Chinese future. Money-lots of it-is being poured into building a national highway system. Incentives are offered, encouraging as many as possible to buy a car, in spite of the fact that the major cities of China are in a constant state of gridlock. The automobile as the economic vehicle (yes, the pun is intended) that developed and vitalized the U.S. economy after World War II is the same model that the People's Republic of China is using now. The development of the interstate highway system in the United States during the 1950s and 1960s is being replicated now in China (concurrent with a railway system that is growing in China, alongside the automobile).

For seven straight months, through the end of June 2009, automobile sales increased steadily. Year-on-year increases were at an amazing 34%. And then there are the other enterprises that go hand-in-hand with that one car (at least) per family concept. For example, after a few years of the climate eating away at a vehicle, not to mention everyday nicks and scratches that occur, a new paint job might be appealing. Transmission and brake replacement franchise-type operations, as well as quick-lube types of franchises, are just waiting to be developed, as are the very China-adaptable do-it-yourself franchises. Just think of a Chinese Manny, Moe, and Jack, the Pep Boys, soon coming to your neighborhood to sell you the parts to install by yourself. Currently, there is no true alternative in China to the franchised car dealer for car repairs. It just might be that finding a good, reliable, local mechanic to fix your car is a universal problem, past, present, and future. But China offers vast opportunities in this area.

College and Careers

This section is actually about jobs (or lack thereof). It is pure hell for the secondary school student going into China's Gao Kao examinations, where everything is on the line in a three-day examination to determine whether or not you will get into a Chinese university. The supply of university vacancies is infinitesimally small compared to the demand for entrance. What happens to those who do not get in? Jobs are not as available as they were in the past. What is far more worrisome to the government is the annual 6.5 million graduates of colleges and universities. There are no jobs available for them either, and this is a problem because Chinese history is full of dynastic changes brought on by discontented students.

Remember the eleventh five-year plan mentioned previously? China has started paying minimum amounts in rural areas as old-age assurance subsidies. Education is one of the other areas where it has begun making payments, and the government announced in spring 2009 that it would nationalize and standardize teaching salaries and encourage its future graduates to go to the rural areas to teach. To what extent this will have an impact upon employment prospects of graduates is too early to determine, but Mao's "barefoot doctors" brought medicine to the countryside during the 1950s, and the new "barefoot educators" just might be joined by medical counterparts in the future, simply to counteract potential student discontent.

Carbon Emissions

The most amazing thing to me about the sixtieth anniversary parade was how clear the skies were over Beijing. The Chinese have truly mastered the art of seeding the skies to keep them clear for major events. Yet these are major events and the cost of keeping the air clear on a permanent, daily basis is simply far too prohibitive throughout China. The air above any major city in China is foul. The financial, health, and environmental costs of air pollution are great, and China recognizes this. Something will be done over a period of time; not because the West wants it but because the Chinese want it.

Former U.S. Vice President Al Gore was right: the United States, with a Mount Everest-like per capita carbon emissions rate, will have to take action prior to the developing nations, instead of just talking the talk. There is no reason to go into this much further: our planet will survive - but what about the survival of mankind?

Corruption

The urban middle class of China is cynical about corruption. With the exception of Singapore (where a one party, Socratic system of government gets more appealing to me over time), corruption exists everywhere throughout Asia. Frankly, corruption is a world problem - it's just masked with more finesse in some places than in others. The next three paragraphs are taken from the October 5, 2009, article I wrote for Tax Analysts. My thanks, obviously, go to this organization for both giving me the opportunity to publish my observations about taxation in nine jurisdictions of Asia over the past six years in my biweekly Asian Tax Review series of articles and for allowing me to take a portion of that October 5 article for use, here, in the Thunderbird International Business Review.

On 2 September 2009, the National Audit Office came out with its annual report, a 96 page document that reviewed the transgressions of each of the 54 agencies it is empowered to review. Both China Daily and South China Morning Post reported this on 3 September. While neither publication went into the juicy detail that I'd love to read about - and which the report authors would prefer that I did not-there were some interesting "tidbits":

• The Ministry of Foreign Affairs "forgot" to return to the central government 132 million RMB of visa and passport fees. Foreign Affairs also failed to enter luxury villas it had purchased over the years on its balance sheet.
• The Chinese Academy of Sciences embezzled over a million RMB to speculate in the stock market - it lost all the money.
• The Ministry of Education "re-appropriated" over three million RMB from its budget for private purposes having absolutely nothing to do with education.

Liu Jiayi, Auditor General of the National Audit Office, stated in this annual report to the National People's Congress that "about" 30 people involved in 116 cases had been arrested and sentenced and that another 117 people "received punishment." Those phrases within quotes appeared in both China Daily and the SCMP. Only 30 people arrested? Only 117 more people punished? In a culture of corruption, that clearly is very small change. From some very good, but completely un-attributable sources, I am told that the big loser in this year's corruption report (presumably, that portion not made public) is the Ministry of Commerce. This report, by the way, does not dwell upon funds collected for the Sichuan earthquake disaster.

The futility of combating corruption in China can be summed up by a quote from the September 3, 2009, article in the South China Morning Post article by Cary Huang, the SCMP journalist in Beijing: "Growing sums have come within the reach of officials from rising revenues and the government's current four trillion RMB stimulus plan. Anti-corruption crackdowns have had limited success." And last, but by no means least:

CPC - The Communist Party of China

An article on China cannot overlook the ruling political party. President Hu's National Day speech extolled the virtues of continuance of the one-party system, advancing into the future through socialism. Now it may be that that socialism is not the correct term to use but I will pay homage to Deng Xiao Ping's statement that it makes no difference whether the cat is black or white, so long as it kills the mice, and accept the term socialism. The Communist Party of China is secure in its position but only as long as it retains its credibility in keeping the stomachs of the urban masses full.

Job creation is going to be necessary, because an economically content urban China will not demand political change. Inroads must be made to visibly reduce corruption because cynicism is simply too widespread. An expos'e of widespread corruption, with reconstruction funds earmarked to redevelop an earthquake-ravaged section of the country that has a population the size of Germany, would do damage as devastating as the earthquake itself. It is appropriate to conclude both this section and this essay with a question: who is currently joining the CPC? If the best and the brightest that China has to offer are shunning party membership, then who are the leaders of tomorrow? Certainly the economy and corruption are high on the list of the concerns of the populace, but what about future leadership?

And a Final "C" for Conclusion I never fail to be amazed by the overabundance of books at the airport bookstores (no matter where you are in the world) that either predict the power that China will wield in the future or foretell China's demise. Sensationalism always does seem to sell. Yet in the nearly two decades I've lived in China, there is only one thing certain: uncertainty.

I do think that China will come out of the worldwide economic depression we are in faster than others, if for no other reason than the size of the treasury it has to work with to rectify its ills. I do think there will be more corruption than the government would care to see. I do think there will be pockets of protests, just a bit more frequently. Yet I also feel that, overall, there will be stability.

Yes, China will have an ever-expanding GDP, but it is not the total that matters as much as the per capita. I'm not sure where I read it but recently I did read that China is #138 on that per capita GDP list. Will China improve in this area? Absolutely, yes, it will. How long will it take? Who knows? After all, "this is China we're talking about," a commonly heard refrain used when attempting to explain a country as vast and complex as the PRC.

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By Laurence E. Lipsher

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