Post Covid-19 Economic Recovery in China

by Joe

Any assessment of current affairs depends upon the selected sources. Our summary here is, in fact, deducted from the information reflected in the sources listed below.  Once, Miami Dolphin Coach, Don Shula, announced a game plan on Saturday.  On Monday morning following the game, a reporter asked Shula why he had changed his game plan at half-time on Sunday?  His response “When I have different information, I reach different conclusions.”  

The Covid-19 pandemic has resulted in an economic crisis in every economy in the world.  Here, in the United States, we are experiencing an economic recession that borders on an actual depression.  Down from a peak of 22 million in April, 2020, US unemployment is still in the 11 million range, or 8.4% of the total labor supply.  Some do not expect employment rates to return to pre-Covid-19 levels until into the next decade and there are three million small businesses that have disappeared and are not expected to return.  Economic conditions around the world are also similarly grim.  However, the Chinese economy is reporting significant improvement since the corona virus breakout.  We think it is important to understand this fascinating nation’s current economic status.

There are two major factors at work in the reported success of China’s economy.

First, the economic hit was never as strong in China as in other economies.  China was better able to contain the virus, due to strong government action, including mass testing (discussed in our August blog).  This enabled the Chinese economy to avoid the long shut-downs that other industrialized and developing nations endured.  Additionally, the CCP responded with “six priorities”, including employment, basic livelihood, company support, food and energy security, stable supply chains, and the more effective operation of government.  Centralized authority does allow for immediate compliance. 

China’s economy has shown comparative resilience versus the US economy in the midst of the Covid-19 pandemic.

Both the United States and Chinese economies are consumer driven.  In the US, consumer spending is more than two-thirds of our total GDP.  Our national government provided several economic stimuli plans to protect the economy; the EIDL small business grants through the Small Business Administration, the PPP (payroll protection program) which enabled businesses to avoid some layoffs and a $600 stimulus check that was sent to every home in the country.  It is important to note that the International Monetary Fund has given only one national economy a positive GDP growth projection in 2020; China. 

As in the United States, China’s economic recovery has been visible for months.  In August, consumer spending was up .5% versus prior year August.  Versus China, Canada, France, Germany, Italy, Japan and the United Kingdom have economies whose economies showed a dramatic contraction during the first half of the year.  Even with a more vibrant economy, Chinese growth in real GDP is expected to be just 1% over prior year. 

As in the United States, China’s economic recovery is not experienced evenly across all income brackets or regions.  China’s wealthiest citizens have fared the best since the pandemic.  In August, car sales were up 12% from prior August; this indicates that Beijing’s car buying incentives are having a positive impact on the economy.  Car sales are so strong that Chinese dealerships have been able to reduce and even suspend planned discount promotions. Similarly, more than a dozen luxury western brands – from fashion to cars – enjoyed double-digit revenue growth in the Chinese market.  In-mall shopping activity has also rebounded.  

Unfortunately, not everyone in China is experiencing the same recovery.  Those in the low to middle income categories have experienced a two-percent reduction in disposable income.  Migrant workers are also experiencing difficulties.  

The US government’s market investment to combat the impact of Covid-19 has been comparatively modest versus other major economies such as Germany and Japan. Economic experts have stated concern regarding the long-term impact of these decisions.

The long-term prediction for China’s economic recovery is V-shaped, according to Christophe Barraud, Chief Economist at Market Securities.  This is because China has a much larger potential for real growth in total output.  According to Barraud, China has a capacity to increase real output by 6% annually, while more advanced economies can only by 1.5%.  In contrast, economic recovery in the United States is projected to be “W”-shaped or possibly “swoosh” (as in the Nike ‘swoosh’) shaped.  Federal Reserve Chairman, Jerome Powell has urged Congress to inject more cash into the economy than the current administration currently has.  US total investment into various post-Covid-19 stimuli is in the range of 15% of GDP.  Conversely, the EU nations have invested 30% and Japan has invested 20%.  Jeffrey Kleintop, Chief Global Investment Strategist at Charles Schwab, has said “Powell is right to call for more fiscal stimulus to aid the US recovery”.

In this fast-changing world, where decisions about your Chinese projects must be made with reliable information and expertise, Word4Asia is your waiting and reliable partner.  If your plans call for our more than 20 years of success in China, we would love to discuss them with you.  You can reach Dr. Gene Wood at gene@word4asia.com

Our Sources

https://www.google.com/amp/s/amp.cnn.com/cnn/2020/09/15/economy/china-economy-retail-intl-hnk/index.html

https://www.ft.com/content/e0e2940a-17cb-40ed-8d27-3722c9349a5d

https://markets.businessinsider.com/news/stocks/economic-outlook-fed-call-more-stimulus-has-point-strategist-2020-9-1029623447#

Confronting the Covid-19 Challenge

by Joe

The Word 4 Asia blog has often contrasted the differences, as well as the similarities, between American and Chinese culture.  We believe that a better understanding of how each culture perceives the world, and behaves within it, is a successful foundation for lasting partnerships between our nations, and our nations’ businesses.  Of course, the biggest story across the entire world in 2020 is the corona virus and how all peoples and nations have responded.  Our blog this month describes how mainland China and Hong Kong have each been able to successfully ‘flatten the curve’.  For the sake of this article we will use the official numbers reported by both countries. The United States, because of our own traditions and culture, has not fared as well and, as of 9/1/20, six months since the pandemic first shaped our present reality, we continue to struggle.

Our two nations have a fundamental difference in priority.  In general, China strongly values community focus.  The United States has historically honored the importance of the individual.  This cultural difference has led to the development of two very different ways of leading each nation’s people through a threat as serious as Covid-19.  In China, community focus leads to personal refusal of putting anyone else at risk.  The Chinese would rather sacrifice some personal liberties than risk extensive exposure to the masses. High density housing in China makes this all the more a factor in their approach.  In the United States, we still teach Patrick Henry’s famous cry, “Give me liberty or give me death.”

Chinese Provinces Aid Medical Team in Wuhan,Hubei to ruturn to Hometown after finishing their work fighting the COVID-19/coronavirus.

According to data released more than 80% of China’s corona virus related deaths occurred in Wuhan.  After the situation there mushroomed and was understood China moved resolutely to take firm control of the situation.  The central government implemented stringent social controls.  Their example is one of the largest mass mobilization efforts in human history.  Examples:

  • All schools were closed
  • All people were forced, and kept, in-doors.  One facet of this included the implementation of formal door-passes for people to get into and out of their apartments and homes.  The entire city of Wuhan, at one point, was closed off; no one was let in, or out, of the city.  
  • More than a dozen huge, temporary hospitals were assembled and thousands of extra medical staff were deployed to Wuhan.
  • Infected people were isolated on an enormous scale, in stadiums, exhibition halls, and anywhere else that could be co-opted for the purpose.
  • China’s huge tech industry also focused on the problem; Tencent and Alibaba both developed ‘health code’ apps that helped monitor and control the spread of the virus.  These apps are similar to ones developed by Google and Apple and widely used in South East Asia and Europe.  All of these rely on Bluetooth technology to detect close contact with infected people.  

China’s response was systematic, comprehensive and coordinated.  Their lockdown was more intense than nearly any other place in the world.  

On the other hand, Hong Kong managed to avoid lockdown and there are several important reasons why they could.

First, Hong Kong had already experienced the SARS epidemic.  The people there were able to use their experience in that earlier event and that made them much more alert and diligent.

Hong Kong, Hong Kong – May 21, 2020 : “Please Don’t Gather” sign outside the football pitch in Kowloon, Hong Kong. The Hong Kong government has imposed restrictions in form of a social distance law as a preventive measure against the spread of coronavirus.

In addition, Hong Kong instituted strong border control and tight quarantine measures.  Examples:  nine out of twelve border checkpoints were closed in January, and starting in late March the city banned all non-residents from entering Hong Kong.

Also, Hong Kong resurrected its network of ‘Neighborhood Committees’ as part of its defense against the virus.  These largely volunteer staffed committees were led by scientists and medical experts and were directed in contract tracing activities such as daily door-to-door check ins and monitoring of ankle bracelets (worn by anyone who had been infected by the virus and used to track and control patient movement).  Local Neighborhood Committees were empowered to seal homes shut, preventing anyone inside homes suspected of infection from leaving until testing and contract tracing had been conducted.   

As mentioned earlier, America’s approach to the pandemic has been very different.  At this time, Covid-19 continues to spread throughout our nation, but there is no centralized mandated control of the situation.  Policy is left to the States and in some cases the city officials. Many of our citizens continue to resist the instructions, advice and direction provided by the CDC with regard to the use of PPE, social distancing, and rigorous hygiene.  We have seen stay at home guidelines lifted once situations were deemed ‘under control’.   Today, we have over six-million cases, over 24% of global cases.  We’ve had 184-thousand deaths, almost 22% of global corona virus-related deaths (keep in mind that the US population is only 4% of the total world population).  On the other hand, despite the fact that Wuhan was the origin of the virus, reported Chinese deaths related to Covid-19 are only 4,634, approximately .03% of their population.  In the US, Covid-19 related deaths are approximately .06% of our population.  

NOTE: Of course, there is legitimate debate regarding whether all deaths reported were caused by Covid 19 or whether these figures simply report those who died were diagnosed as having Covid 19. We also have chosen here to use officially reported figures to illustrate a cultural differential.

The point of this article is not to debate cultural values.  Our intent is to simply describe how each nation has responded.  In the United States, we have a heritage of protecting the ‘civil liberties’ and ‘human rights of our citizens.  Does the well being of the community supersede the rights of the individual? How a country responds in crisis reflects assumptions of priorities and values. We wish well for both countries and quick resolution to this challenging time. Hopefully COVID 19 is something we look at in the rearview mirror in 2021.  

Word4Asia works hard to help our clients understand the challenging environment in China.  It is a country full of promise where we have spent over two decades helping our clients achieve their goals.  If your path is leading you towards China, we hope you’ll contact us.  You can reach Dr. Gene Wood at gene@word4asia.com

China’s Aging Population

by Joe

Economic Implications of the One-Child Policy

By 2050, 25% of China’s population will be over 65 years old.  This situation is the number one economic problem that China will face moving forward.  

China’s aging population presents a unique social and economic challenge to today’s younger population.

How did China get here?  During the Maoist period following the famous words “more people more power” the nation became the most populous nation on earth.  The obvious challenges of unchecked population growth resulted in the ‘one child policy’ in 1979.  In 2016, this policy was changed again, allowing for two children per household. If able to pay the requisite tax more children are permitted.  Today, China is at a turning point and staring into what the Chinese Academy of Social Sciences (CASS) has described as ‘unstoppable’ population decline.  The Chinese population is hemmed in from two sides, decades of declining birth rates on the left, and steeply rising life expectancy (improved medical technology, improved nutrition) on the right.

The CASS predicts that China’s population will peak in 2020, at 1.44 billion.  It’s expected that this will usher in a period of ‘negative population growth’; by 2065, the population is expected to have returned to. Mid-1990’s population levels.  A shrinking population may argue a shrinking economy as well.

There are indicators this is already happening.  Look at the last four years of Chinese national birth rates:

2016:  17.9 million births

2017:  17.2 million births

2018:  15.2 million births

2019:  14.6 million births

These national figures, striking as they are, hide some of the most significant changes occurring in the provinces.  Some areas are reporting birth rate declines as steep as -35% per year.

Despite the fact that China increased the official child-per-family policy to two children in 2016, Chinese families have not rapidly moved to increase in actual size.  There are both sociological and economic reasons at play.  Women have found an important place in China’s economy and are reluctant to sacrifice a position they have worked hard to attain. After all “women hold up half the sky.”   Despite the systemic, positive discrimination favoring male students, more women than men attend Chinese universities. Women are responsible for 41% of Chinese GDP–the highest proportion in the world. Some 7 in 10 Chinese mothers work. Eighty percent of all female self-made billionaires, globally, are Chinese.  While Chinese women have earned hard-won economic success, Chinese employers frown on the idea of their female employees taking more time from their jobs to have a second child.

Today, there is a massive in-balance in the number of males versus females in China.  Males outnumber females by 34 million people.  This problem also arose during the official one-child-per-family era.  During this time, male children represented a greater economic advantage than female children.  Faced with the one-child policy, sadly, many families chose to abort female babies despite the fact to do so violated Chinese law.  Today, there is a massive in-balance in the number of males versus females in China.  Males outnumber females by 34 million people.  Presently, there are 24 million single men of marrying age in China who cannot find wives – this is the combined population of Texas and New York state.  China is already paying a heavy social price for this.  Multiple studies implicate gender imbalances in maladies including reduced consumption and real estate bubbles, and correlate with spikes in violent crime, spousal abuse, trafficking and prostitution.

With four parents and eight grandparents to support, Chinese parents are finding it difficult to support one, let alone two, children.

Young Chinese couples are also struggling with economic pressures, including rising education and housing costs.  It’s hard to support one child, let alone two.  Biology also plays a part; the policy change is only several years old.  These young couples grew up during a period when it one child families were the universal rule; larger families represent an uncomfortable change for them.  In addition, many of China’s women have passed their peak fertility age.  Another major economic challenge is China’s pension shortfall amidst an aging population.  Current projections show that China’s pension funds will run dry by 2035.  With no pension funds available, young couples will face the economic pressure of supporting eight grandparents and four parents.  The problem is especially acute because these young men and women have no siblings of their own to help shoulder the costs.  

The future that China is quickly approaching is not one that matches China’s aspirations for global supremacy.  Instead, the picture that Beijing’s National Academy of Economic Strategy. Paints features a society where its younger people are burdened by the care of elderly parents and grandparents, living in an economy that is crippled by unsustainable debts. Again, signs of this economic weakness are already at hand; China’s pension shortfall topped $130 billion in 2019, further adding to the nation’s debt burden which is already estimated at three times its GDP.  As China moves into the future, this situation may become untenable; in 2014, there were 880 million working adults in China.  By 2050, that number is projected to fall to 570 million.  This situation also presents a massive macro-economic question:  how will China create the required demand for housing, consumer goods and so forth?

Staying abreast of what is happening in China is critical for any organization that aspires to operate there.  For over 20 years, Word4Asia has helped our clients legally and successfully navigate in this fascinating and challenging nation.  If your plans include work in China, we’d appreciate an opportunity to learn more about where you’re going.  We may be able to lend you the support you’ll need to achieve the success you’re aspiring to.  Contact Dr. Gene Wood at gene@word4asia.com

China’s Middle Class

by Joe

Over the last forty years, China has achieved a dominant position among the major world economies.  Several factors have contributed to this.  First, China became a supply chain hub for most of the world’s manufacturing processes.  More recently, the single most important factor in China’s continued GDP growth has been the unexpectedly rapid rise of a new digital economy.  This sector is now estimated at more than $3 trillion, or a third of national output. R&D investments in China’s tech sector have tripled in the last ten years to $440 billion per year and 9 of the world’s top 20 internet companies are Chinese.  The remainder are American firms plus one Canadian company.  A Tufts University survey ranked China the most rapidly evolving digital economy in the world. 

Over the last forty years, China’s middle class has become a major economic force.

This economic growth has produced a burgeoning middle class.  Current estimates put the size of China’s middle class at 400 million people or 140 million households. This is less than one-third of China’s total population.  Among them, the urban affluent population is concentrated in the eastern and coastal provinces that witnessed rapid growth as China invested in developing local industries and supply chain logistics capabilities that could connect easier with the rest of the world. 

In addition to expanding industries, the Chinese government has added legislation such as tax reforms that have left the Chinese with more disposable income.  Changes have included raising the tax-free threshold from RMB 3,500 (US$516.70) to RMB 5,000 (US$738.14) a month and adding new deductions, such as for parental aged care, housing mortgage costs, education costs, and healthcare costs, among others.

The growth of the Chinese middle class has been astounding.  In the last forty years, China has rapidly urbanized.  58% of its population is now urban.  In 2000,  only 4% of those urban households were middleclass.  By 2017, that statistic had grown to 30%.  This pales, however, with what’s projected to come in just the next few years.  McKinsey & Company now estimate that by 2022, 76% of China’s urban population will qualify as middle class.  McKinsey qualifies middle class as Chinese households that earn the equivalent of between $9,000 and $34,000 annually.  (These projections are all pre-pandemic.) 

There are at least four different ways the Chinese might classify themselves as middle class; these include occupation, income, consumption and self-image.  The population of the middle class under each classification system follows:

  • By occupation – 136m people
  • By income – 211m people
  • By consumption – 300m people
  • By self perception – 402m people

When membership in more than one of these groups is a requirement for middle class membership, the total number of people that would qualify drops sharply.  For instance, if belonging to each of the four groups was a requirement,  the total number of middle class would drop to about 4 million people in all of China. Membership in China’s middle class is a fragile thing.

China’s middle class spends money differently than the way American middle class families spend theirs.  For example,  The Chinese people are better savers than American families are.  China’s young middleclass families watch their budgets by buying in bulk and buying ‘on sale’.  They rarely eat out or travel abroad.  The Chinese also place a higher value on education.  Rather than spending on non-necessities like many western cultures do, Chinese families invest in education and on their children’s extracurricular activities such as music or dance lessons.  It’s thought that these activities will give Chinese children an edge when it comes time to explore opportunities to study overseas.  This emphasis on education is understandable.

The intense focus on education occurs because admissions into Chinese universities is much more scare than in the United States.  China’s college entrance examinations see more than 10 million students competing to secure a spot in one of the 150 tier-one universities.  There are at least ten eager students for every available opening in those universities.

As China’s middle class has become an important consumer market, top US retailers have found new ways to profit from the opportunities.  Walmart has conducted business in China for twenty years and is stepping up its investment.  The retail giant plans to open 14 more Sam’s Club membership stores by 2022, bringing its total Chinese store count to 45 locations.  Besides opening new locations, Walmart is also spending to upgrade its Chinese retail stores.  In 2018, Walmart spent $56 million on renovations.  Their longterm plan through 2030 is to spend over $8 billion to further develop their supply chain.  

Among the Chinese middle class is a cohort known as G2 consumers.  They are typically teenagers and people in their early 20s, raised in a period of relative abundance.  It comprised nearly 200 million consumers in 2012 and accounted for 15 percent of urban consumption. In ten years’ time, their share of urban consumer demand should more than double, to 35 percent. By then, G2 consumers will be almost three times as numerous as the baby-boomer population that has been shaping US consumption for years.

The G2 generation, Chinese teenagers, will represent over 35% of total consumer demand by 2030.

Their parents lived through years of shortage and focused primarily on building economic security. They are confident, independent minded, and determined to display that independence through their consumption. Most of them are ‘princelings’,  born and raised during a period when China’s one-child policy was strictly enforced.  According to McKinsey and Co. research, this is the most westernized Chinese generation ever. They get emotional satisfaction from buying higher priced products, are brand loyal, and prefer niche versus mass marketed brands.  They are early adopters in new categories like personal digital gadgets, and like their western counterparts, are more likely than previous generations to check their peers’ social media posts for product endorsements before buying things.  They also have strong influence on family purchases.  

It isn’t just imported American brands that are doing well in China.  China’s newly minted middle class is rapidly gobbling up the products offered by native Chinese brands such as Huili (athletic shoes that compete with Nike and Adidas) and Perfect Diary (a cosmetics brand that goes head-to-head with Revlon and similar brands). These start-ups target China’s millennials and market their products using flashy campaigns that include popular Chinese singers and partner with widely recognized Western icons such as the British Museum of London.  In addition to achieving a high level of sales ($14 million in 2018), Perfect Diary is also opening a large number of stores in China.  The company opened 40 locations in 2018 and plans to open 600 by 2022 (pre-pandemic forecast).  Other American brands that are capitalizing on China’s booming middle class include Starbucks, Apple, Kentucky Fried Chicken and Netflix.  

Technology companies are the most important factor in China’s modern economy.

Things may be changing for China’s middle class, however.  The country’s strong economic growth is slowing as changes in political philosophy have led to tightened restrictions on the flow of funds out of China and a reduction on news from the west.  The trade war with the United States has also weakened the dollar:yuan exchange rate, making imported US products more expensive.  One Chinese university professor in Guangzhou recently described her outlook on the short-run economic situation by saying, “It’s just like watching our car enter a tunnel, but suddenly finding there is no way to turn on the headlights.”   Interpretation:  The future is unknown, and it’s not a comfortable feeling.  

There is a growing public perception that purchasing power is shrinking.  As the value of the rmb starts to lose value, wealthier Chinese are focused on “preserving the value” of their assets.  One tactic people are using is transfer of their money to foreign banks.  Even with these hedges, the general belief is that the rapid economic growth of 10% or more in recent years will continue to slow down.  Annual growth in GDP of 3% or 4% is projected for at least the next five years.  

The face of China is always changing.  This fascinating country offers both cultural and economic opportunities.  For over twenty years, Word4Asia has been on top of these changes and this has allowed us to play an important role in our clients projects.  Are your plans calling you east to China?  We’d be happy to meet with you to discuss ways we can help you chart a more successful path.  Contact Dr. Gene Wood at Word4Asia with any inquiries (gene@word4asia.com).  We look forward to hearing from you! 


Sources:

https://www.tandfonline.com/doi/abs/10.3200/AAFS.33.2.67-83?journalCode=vasa20

https://www.hooplaglobal.com/news/chinese-middle-class-is-growing

https://www.inkstonenews.com/business/chinas-rich-are-trying-move-their-wealth-abroad-yuan-weaks-and-price-rises/article/3026498

https://asia.nikkei.com/Opinion/China-wants-to-be-a-middle-income-country-without-a-middle-class

https://www.latimes.com/71189283-132.html

https://www.ifri.org/sites/default/files/atoms/files/ifri_av69_thedistinctivefeaturesofchinasmiddleclasses_ekman.pdf

 

Post Covid-19 Economic Recovery In China

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