As ground-zero for the worldwide pandemic, of all nations, China has had the longest period of all nations to contend with, and recover from, the economic impact of the global recession that followed it.  As covered recently in this blog, China has managed to be the only major economy to register economic expansion in 2020.  However, this has not been without costs elsewhere in the nation.  One of the areas that China has suffered a setback was in their chronic pollution problem.   As China’s lockdown ended in the final months of 2020, many of the major gains in pollution abatement had disappeared, literally up in smoke.  

China has a stated goal of becoming ‘carbon neutral’ by 2060.  However, like many industrial nations, China is also in a Catch-22 situation with regard to continuing to expand their economy while also meeting their goals to reduce their carbon footprint.  China’s industrial infrastructure is industry-driven and, in 2019, over two-thirds of their energy was coal (dirty energy) supplied.   Coal-based energy is a leading contributor to their challenging air pollution problem.  The Chinese cities with the biggest air pollution challenges include Taiyuan, Beijing, Urumqi, Lanzhou, Chongqing, Jinan and Shijiazhuang.

One of the dilemmas China may face in achieving their 14^th 5-year plan (the first plan was published in 1953) lies in disagreement among their top government officials about policy priorities.  In 2020, the party boss of the Ministry of Ecology and Environment stated that while China remains steadfast in their 2060 goal, provincial efforts to supercharge their post-covid economic recovery, were having a negative impact on winning the ‘blue sky war’.   Four of the 20 points stated in this latest Five-year Plan address climate change.  They include:

• Reduction in energy consumption per unit of GDP(%)
• Reduction of CO2 emissions per unit of GDP (%) 
• Forest coverage rate (%)
• Comprehensive energy production capacity. 

All four of the energy- and climate-related indicators are labelled as “binding”.  A link to an excellent article from Carbonbrief.org can be found at the bottom of this blog.  It provides a thorough summary of all climate-change related policies included in the 14^th Five-Year Plan.

Ironically, even as China continues to expand their coal-fired plants, the nation’s air pollution problem is also eroding their gains in GDP.  According to a report co-published by Greenpeace and CREA (Council of Republicans for Environmental Advocacy), in 2018, dirty air cost 6.6 percent of China’s GDP, compared to 5.4 percent for India and 3 percent for the United States.  Agriculture is one of the hardest hit sectors in China’s economy.  The skies are so murky that declines in photosynthesis are reducing crop yields, forcing China to increase the amount of grain the nation imports.  A Chinese agriculture expert suggested that, at present levels, smog will create a situation “somewhat similar to a nuclear winter.” 

An economic recovery which does not also address the pollution issue in China will have major implications for China’s future economic health as well. According to a report released by Greenpeace and CREA, Pollution is also threatening China’s political stability. According to a Harvard survey conducted in 2016, one-third of respondents in China said they would petition or protest against air pollution had it negatively affected their own health or the health of their family members.  It isn’t only China that is being impacted. 

Recent research shows that Chinese air pollution has actually contributed to up to 65 percent of the ozone increase in the Western United States. We are, after all, one world. 

At the same time, in late 2020, during a video conference with the UN General Assembly, President Xi stated recently that China is aiming to hit peak emissions before 2030 and to achieve carbon neutrality by 2060.  To understand how big a commitment this is, consider these three statistics: 

• China produces 28% of the world’s CO2 (a greenhouse gas).
• 50% of the world’s coal consumption is burned by China each year.  
• Over 25%of the world’s climate pollution originates in China.

China has certainly itself a BHAG (Big Hairy Audacious Goal).  

In the same address, President Xi also called on all countries to achieve a green recovery for the world economy in the wake of the coronavirus pandemic.  President Xi also promised that China will start down this road right away by instituting more vigorous climate policies.  Assuming that China stays on course with this commitment, this could also mean reductions in the amount the nation invests in oil development.  China is the biggest energy financier – as well as the largest oil market.  

Various environmental advocacy groups have stepped forward to assist China meet their commitment to carbon neutrality by 2060.  One of these is the Environmental Defense Fund.  The EDF is working with the Chinese government to launch a national system to control climate pollution.  Specifically, the EDF has helped China in the following ways:

• Develop a carbon market (carbon credit system).  

Initially, the national carbon market will cover the power sector, which includes over 1,700 mostly state-owned companies.  This will make it the world’s largest carbon market.

Moving forward, this national carbon market will expand to include more than 7,000 companies in eight industrial sectors (power, petrochemical, chemical, building materials, iron and steel, nonferrous metals, paper production, and aviation). 

• Market-based Emission Reducing Incentives

Over the past two decades, EDF has helped China establish a variety of market-based incentives to cut emissions and strengthen enforcement of environmental laws.

• Already, the EDF has trained over 3,600 government and industrial stakeholders on carbon credit trading.  
• 58,000 Chinese environmental officers have already been trained
• Under EDF guidance, one million tons of greenhouse gases have been verifiably reduced through low-carbon farming techniques.
• Providing input into new environmental policies and programs which are being included in China’s latest five-year plan. 

Under the new administration in Washington, The US and China have also begun collaborating to combat climate change.  John Kerry and Xie Zhenhua, the climate envoys for the world’s two biggest economies, have agreed to work together “to tackle the climate crisis” with specific, measurable actions that will reduce emissions in ways that are consistent with the 2015 Paris climate accord.  In a joint statement, Mr. Kerry and Mr. Xie said, “Both countries recall their historic contribution to the development, adoption, signature, and entry into force of the Paris Agreement through their leadership and collaboration,” This agreement is particularly significant because it has been reached despite the economic and human rights tensions that exist between our two nations.  

China’s progress in addressing the climate crisis is just one of the many facets of life in China we stay abreast of at Word4Asia.  We believe that God has assigned mankind to be wise and responsible stewards of all the resources He has given us.  In much the same way, we are dedicated to working as stewards of the goals and objectives each of our own clients contract with us.  If your plans include China, we believe that our accumulated experience, our mainland China network, and our professional code of ethics may make us an ideal resource for you.  If you’d like to find out more about the work we do, and how we may be able to help you, we hope you’ll contact us.  You can start by reaching out to Dr. Gene Wood at gene@word4asia.com

https://time.com/5935138/chinas-environment-economic-recovery/

https://www.bbc.com/news/science-environment-54256826

https://www.edf.org/climate/why-china-center-our-climate-strategy

https://www.ft.com/content/71f724ff-a25c-4ff7-8713-b0aa02d3adb5

Q&A: What does China’s 14th ‘five year plan’ mean for climate change?

In last month’s blog, Word4Asia reviewed changes in China’s economy that have occurred since the Covid-19 pandemic first appeared.  We chiefly focused on changes in the way China’s consumers have adapted to the new realities.  In this month’s blog, we review the anticipated changes that China’s businesses are experiencing.

In July 2020, The Diplomat completed a  survey of 135 Chinese senior executives regarding their outlook on post-pandemic economic recovery.  The sample was not representative and was skewed toward high-tech and online companies (55 percent).  However, it did include a mix of industrial and automotive firms (11 percent), financial (8 percent), and consumer/retail segments (13 percent), as well as healthcare (8 percent), media and education companies.  

The survey revealed that 80% of the companies were experiencing a negative impact following the pandemic. A decline in sales, and resulting layoffs were expected.  This was true even for companies that were entirely focused on the Chinese local market.

As time has passed, 50 percent of the surveyed firms believed they’d have to reduce headcount by more than 25 percent.  In reality, it’s turned out that only 20 percent of large companies have been required to do so.  

One-third of the companies originally surveyed have had trouble paying their rent, making payroll, or paying their bills.  On the other hand, 20 percent of tech/online and large-sized companies have actually done better than projected.  Small and medium sized companies have fared the worst during China’s economic recovery.

To adapt to the difficulties many companies are experiencing in China, Chinese managers are already moving headlong into revising their strategies, tactics and operations.  In a recent study, the management consulting company, McKenzie, recommended the following actions:

Updating new product development roadmaps:  Updated plans must reflect the trends that have been developed throughout the pandemic.  Sparkling Zero series is performing extremely well. Brand upgrading is a major shift. Consumers are looking for higher quality, established brands. We’ve also captured in-home consumption by converting consumers to premium take-home packs, like mini-can multipacks, shifting away from big bottles. This shift could also be long lasting as consumers build in the habit of consuming higher quality products in a size that is right for them.

Developing new distribution channels:  In last month’s blog, we reported on the ways Chinese consumers have moved much of their purchase behavior to e-commerce.  Prior to the pandemic, Chinese consumers were already ahead of the rest of the world in total e-commerce spending.  Sales strategies will have to reflect the new trends, including developing different online and offline channels, including direct-to-consumer, social commerce, ecommerce marketplaces, and physical channels.   

For example, China’s convenience stores and drug stores have seen a long-term increase in consumption while clothing stores, and department stores have seen a long-lasting decline.  Manufacturers will either have to find ways to penetrate new channels or suffer an erosion in sales.

With the heightened attention in hygiene and health, Chinese businesses will be reviewing their supply chains to safeguard their employees and consumers.  Risk mitigation will be, and alternate material sourcing should already be underway.  These changes have been felt differently across various industries.  For instance,“contactless” car return service, and other self-service measures, including delivering disinfected cars for pickup and drop-off by customers in community areas.  Store employees were also provided with protective equipment and disinfectants to prevent virus transmission.

Improved flexibility:  The world may be in store for future pandemics.  The way the environment is changing, it’s almost a certainty.  The world economy is also increasingly volatile.  Chinese management teams adopting a more flexible perspective and building contingencies into their plan’s organizations.  Chinese firms have been optimizing their investment in ad campaigns, to actually reduce consumer demand, and re-negotiating contracts.

The technology sector is one area which is not at all certain at this time.  Over 40-percent of Chinese tech firms have a level of concern regarding access to global technology.  The US-China trade war is one reason for this, as the United States has tightened down on Chinese access to American technology.  In addition to the United States, other leading tech nations, such as Japan, South Korea, Germany and Singapore are also de-coupling with China.  The majority of executives surveyed by The Diplomat have forecast some level of U.S.-China decoupling in the technology sphere. Looking out five to 10 years from today, in fact, across all company types — local Chinese tech and non-tech companies, and MNCs with headquarters in the U.S. or non-U.S. countries — only a minority believe we will have a globally open marketplace where Chinese and U.S. tech companies continue to compete in each other’s home markets.  In response, Chinese tech firms are planning to access more of their technology from other Chinese firms within the PRC itself.

The pandemic has changed business across the world.  Business in China, which has for many years experienced a long trend of annual growth, is clearly at an inflection point.  How its managers address this new challenge will have an impact on any organization with objectives there.  At Word 4 Asia, we make it our business to keep our network members and stakeholders abreast of these changes.  We’ve succeeded in helping our clients accomplish their objectives in China by understanding the nations’ regulatory requirements and respecting  its culture and values.  If your organization is interested in possibilities in China, we would enjoy a conversation with you.  Our knowledge, experience and mainland network may be just what you need to succeed.  Feel free to contact us at: gene@word4asia.com

https://thediplomat.com/2020/07/after-covid-19-rebooting-business-in-china/

https://www.mckinsey.com/featured-insights/asia-pacific/how-consumer-companies-in-china-are-preparing-for-the-next-normal-a-virtual-roundtable

https://www.mckinsey.com/~/media/mckinsey/featured%20insights/china/china%20still%20the%20worlds%20growth%20engine%20after%20covid%2019/mckinsey%20china%20consumer%20report%202021.pdf

https://wtop.com/news/2020/01/top-10-countries-for-technological-expertise-ranked-by-perception-2/

It’s beginning to seem like there is light at the end of the Covid-19 tunnel.  Economic recovery is the topic of conversation everywhere.  It’s almost like being at the horse track, with people trying to separate the underdogs from the sure bets.  To extend the analogy, many people have their money on China right now.  

People who have placed their bets on China are wagering that the Chinese economy will overtake the United States by 2028.  The UK-based Centre for Economics and Business Research (CEBR) has said that China’s “skilful” management of Covid-19 will boost its relative growth compared to the US and Europe in coming years.  They also project that India will become the world’s third largest economy by 2030.  

How will Team USA do?  The report says that after “a strong post-pandemic rebound in 2021”, the US economy will grow by about 1.9% annually from 2022-24 and then slow to 1.6% in the years after that. Compare that with China’s projected growth during the same period.  By contrast the Chinese economy is tipped to grow by 5.7% annually until 2025, and 4.5% annually from 2026-2030.

While most of the world’s major economies experienced major set-backs in 2020, China actually posted impressive growth.  For instance, world trade likely contracted by 5.6% last year.  However, China’s shipments increased 3.6%, according to estimates from the United Nations’ trade and development body UNCTAD.

It’s also believed that China regained the title as the world’s top destination for foreign investment, having lost that position to the US in 2015.   Fortune magazine’s list of The Global 500 largest companies by revenue now has more Chinese companies than US companies, 124 vs. 121.  In a year where US movie theaters remained closed, Chinese box office receipts overtook the U.S. – another ‘first time ever’ achievement for China’s economy.

Obviously, there are many factors pointing to a bright economic future in China.  

At the same time, major question marks also hang like ominous clouds in China’s economic sky.   After decades of talk about correcting our nation’s trade imbalance, the United States has made significant inroads in that direction.  If we are able to continue this shift in the balance of trade, it will soften the projected growth rate of China’s economy.  In 2019, the American Chamber of Commerce surveyed its 314 member companies and institutions.  30 to 50 percent of them indicated that they were considering adjusting their supply chain strategies to reduce reliance on China, either by seeking alternative sources or relocating production outside China.  20 percent of AmCham survey respondents also reported their intent to “decouple” from their Chinese trade relationships.  

Three additional factors also indicate that COVID-19 has prompted a restructuring of the China-world relationship.  These include:

Increasing US and Global Resistance to Chinese Trade

Changing sentiment among US companies and consumers. Risk diversification is a driving motivation.  As a result of the outbreak, 16 percent of US companies indicated they will at least partially move production and/or supply chain operations outside of China, and 28 percent are making similar adjustments regarding sourcing.  The opinions of American consumers have also soured, following the pandemic, according to a survey conducted by the Pew Research Center, in March, 2020.

Outside the United States, other first world economies, such as Japan, are also calling for a reshoring of supply chains as a result of COVID-19.  Japan, for instance, has earmarked $2.2 billion to help its manufacturers shift production out of China.  In the US, our legislature has identified the obvious over-reliance on China in the critical area medical supplies.  Australia’s politicians have followed soot.  

Changing Consumption Patterns Among China’s Affluent Consumers

Increasing affluence and consumerism among China’s citified younger generations has been a major force behind China’s economic growth.  However, Covid-19 has shifted priorities and values here, too.  

Attitudes to spending among consumers in their 20s and 30s, traditionally the engine of China’s consumption growth, have changed markedly in the wake of COVID-19. One survey showed 42 percent of young consumers intend to save more as a result of the virus. Consumer lending has also declined, while four out of five Chinese consumers intend to purchase more insurance products post-crisis. Savings have also rocketed—the country’s household deposit balance increased by 8 percent over the first quarter to reach 87.8 trillion RMB. Meanwhile, 41 percent of consumers said they planned to increase sources of income through wealth management, investments, and mutual funds.

The virus has also forced purchasing trade-offs, with consumers seeking better quality and healthier options:

Until COVID-19, the Chinese were incredible consumers of tech products.  However, the pandemic has severely disrupted the economy, and triggered profound changes in consumer behavior.  This demographic has been the driver of China’s domestic economic growth.  In fact, a recent report by McKinsey revealed that 40-50 percent of their survey’s respondents reported that they ‘never worry about income because their parents can easily cover expenses’.  An additional 40 percent of respondents aged 20 to 30 indicated that they had received help from their parents when buying an apartment.   However, the pandemic dealth this segment of China’s population a major blow.  For the first time in their lives, many of these people are now experiencing  personal financial worries.  Scarce resources and the concept of economic trade-offs are now their reality, not just theory.  

With trade-offs, the importance of investing and saving, and reducing personal consumption is coming to the forefront.  42 percent of those respondents who were surveyed in a recent poll report their intention to save more than before COVID-19.  China’s banks are also tightening the flow of consumer loans.  Increased savings, declines in personal consumption, and a reduction in consumer loans all have a dampening effect on economic growth.

According to a post-epidemic survey, close to half of Chinese respondents intend to live more frugally and seek value-for-money when selecting products, while 36 percent are more willing to spend more for better quality products. Chinese consumers are also more focused on safer, higher-quality, and eco-friendly products than they were before the pandemic.  Consumers are potentially seeking quality in their necessities, while focusing on value-for-money

A survey reveals that post-COVID-19, consumers increased their net purchase intention by the largest degree toward essential, health-oriented products, such as sanitary and health products, fresh food, and life insurance, while expressing negative net purchase intention towards non-necessities such as hair and beauty products, and large home appliances.  Since durable goods sales are also a traditional bell-weather of economic growth, this may also spell trouble for China’s economy.  

Word4Asia will continue to monitor and report on the predictions for post-pandemic economic recovery in our next few blogs.  As always, we remain dedicated to helping our clients adjust to the ever-changing, always fascinating opportunity that is China.  We enjoy a strong mainland China network which we have cultivated over the last twenty years.  If your plans include China, we would enjoy sharing our expertise with you.  Contact Gene Wood at gene@word4asia.com.

https://www.bbc.com/news/world-asia-china-55454146

https://www.japantimes.co.jp/news/2021/01/15/business/economy-business/china-economy-beating-world/

https://www.mckinsey.com/featured-insights/china/china-still-the-worlds-growth-engine-after-covid-19#

_{https://www.mckinsey.com/~/media/mckinsey/featured%20insights/china/china%20still%20the%20worlds%20growth%20engine%20after%20covid%2019/mckinsey%20china%20consumer%20report%202021.pdf}

http://www3.weforum.org/docs/WEF_Future_of_Consumption_in_Fast_Growth_Consumer_Markets_China.pdf

Anyone who has not been in a coma for the past 12 months can speak to the challenges of 2020. I cannot add much to the macro review of last year which has not already been said, repeated and then responded to.  A few friends and of course our loyal Word 4 Asia Consulting clients have asked me “How is it going for you”?  Word4Asia has served a liaison between Western nonprofits and parallel organizations in China. Our primary roles are advising but also bridge building.  When our friends at SARA, in Beijing, wrote to ask what the view of religious people in America thought about events occuring  iin China, specifically in light of the world-wide pandemic, we gladly responded. After all, building greater understanding between the peoples of our two great countries is as important to us now as it has ever been.  

Our work continues to be about building relationships across the small ocean which divides us.    How do we interpret recent events in Hong Kong?  What is the truth regarding the Covid virus, it’s origins and current status?  How has American rhetoric towards trade and human rights impacted Anglo-Sino relations?  What do the most recent religious policies and regulations mean?  What is behind the recent focus on Sinicization?  Will it permanently alter the shape and ethos of the five legal religions in China?  Making all the previous questions more intriguing is the lack of international travel. While absence may make the “heart grow fonder” it also has potential to create unwarranted suspicion and misunderstanding as well.

For building better understanding cooperation with the people of China, there has never been a better option than face-to-face dialogue.  When will this be possible again?  Frankly, Word 4 Asia has no answer, but, so far, neither does anyone else. Until Covid is under control, full routine flights between the USA/China are not going to happen.  No one is more disappointed than the team at Word 4 Asia, and we thank our clients for their continued understanding during this difficult time. While we live in this uncertain reality, 2020 was a good year for Word4Asia.  We were able to assist our clients in the completion of their positive and worthwhile objectives in spite of the challenges. I give credit to the following dynamics for being able to report this.  

• Our exceptional staff who understand China far better than I ever can. 
• 25 years of personal relationships in China.  Trust is built over  a lengthy period of time. When relationships move from trust to love, the bond is never truly broken. 
• Clients who actually listen to counsel and have long-term objectives. A journey of a thousand miles not only begins with the first step, but sometimes we must take a rest or even a couple steps back.
• Many wise advisors in China who give us invaluable insights. They include business persons, politicians, pastors, party members and friends. Their combined words will paint the China mosaic for us as we continually improve our ability to listen well. 
• Clients who genuinely seek to be “friends” of China and will patiently learn to look at China through Chinese eyes. 

 For almost 25 years now, Word 4 Asia has kept our commitment to remain transparent and legal in all our transactions and dealings. When our clients come under our umbrellas, they also make a commitment to this path. Do we face frustrations?  Surely.  Do we wish the entire world could share our conclusions, thoughts, values and opinions?  Of course. Such is in our humanity, this insipient arrogance.  Bridge building is hard work. In the past year it might appear that both sides of the Pacific Ocean have shifted their shoreline a bit.  Word 4 Asia will assess the shifts, and find the bed-rock upon which we can establish a stable bridge for the next decade.  If your organization is seeking help to bridge the China divide, please do not hesitate to contact us. Word 4 Asia is looking forward to another great year in 2021.  Perhaps you can join us in flight when the skies are full again with happy travelers.   

Dr. Gene WoodPresident/Founder