The Phenomenon of Trade in China
The Phenomenon of Trade in China
“China is a phenomenon. Everything they are trying to do now, has never been done in human history,” said Eric Hsu, Commercial Officer, US Department of Commerce field office in Seattle. Hsu explained, to area business people, the challenges of doing business in China, for a program sponsored by the Big Sky Economic Development, “Dueling Tigers: Expanding Opportunities and Building Business in China and India.”
US businesses can do business in China, but it’s not easy, according to Hsu, whose agency is under a mandate from the US Congress to expand US trade in China.
China is not a place to try to run a business remotely. Keeping up to date with the day-to- day changes is important, and it is also important to protect against counterfeiting. Hsu urged the prospective exporters to work through Commercial Services in order to know the best approaches.
Seeping over from the 70s, the image of China held by most Americans is usually that of a dictatorship. But, said Hsu, that’s an image that must change because China is now “a modern market.” A lot of American companies look at China as a backward country. They think they can sell products that they couldn’t sell here. That is a mistake,” said Hsu, a US born citizen, served as a commercial officer at the U.S. Consulate General in Shanghai, China and deputy senior commercial officer at the U.S. Embassy in Kuala Lumpur, Malaysia.
Gone are the farm collectives in China. The average rate of economic growth over the past 30 years has been 12 percent per year. China’s economy grew by $4.42 trillion in 2008, ranking behind only the US and Japan. If they remain on that same trajectory, in 20 years, China will have an economy larger than that of the US.
China is the US’ second largest export market, after Canada.
China is in the process of changing from a centrally planned economy to a market-driven economy, although ‘it is still not capitalist,” said Hsu. “Government is still all over the place. It’s still socialist to the ‘inth-degree.’”
“China is till transitioning from a rural agrarian economy to more urbanized, under the rule of law,” continued Hsu.
That China has a single child policy has “huge implications,” said Hsu. Everyone born after the late 70s have never had a brother or a sister. Every child is looked after by six adults and is “totally pampered,” said Hsu. “I thought children were spoiled here,” said Hsu, “but it’s nothing compared to China.” They are spoiled “to the point that as adults they are still trying to find themselves and they behave very selfishly.”
A one-child society also means they are a rapidly aging society.
They are growing a middle class very slowly, but that middle class has “an amazing disposable income,” said Hsu. An income of from $5000 to $14,000 (US) is considered middle class in China. The middle class tend to be well educated and work in white collar jobs. And, whereas in the 90s a luxury was considered to be a watch or motorcycle, color televisions, refrigerator or washer and dryers; today it’s a car or your own condo, or going on vacation overseas.
By 2015, 60 percent of the Chinese population will be middle class; by 2025, 76 percent.
While they may be pampered to the extent of wondering what kind of leaders they may prove to be, “there are also a lot of extremely smart young people,” said Hsu. Education is very important and they want to attend English-speaking universities because they are superior to China’s schools. In China education is focused on memorization rather than problem solving.
Demand for education outstrips availability of good schools, making the competition to qualify intense. There is a high suicide rate as a consequence. The top preference is to study in the US, the opportunity for which has diminished since 9-11.
The emphasis of memorizing and reciting as a foundation of education has its roots in the culture, and is also reflected in the very serious counterfeiting violations with which the country struggles. Hsu said that it will take a long time for China to correct the problem, and it could affect their growth.
A lot of their knowledge is based on “reverse engineering.”
China has experienced 30 years of economic growth. The young people “haven’t been really tested yet,” said Hsu. “They have never experienced a day of economic recession.”
The youth are materialistic and like to spend money. While China is known for its high savings rate, “The real rate is obscured by the savings of the older generations.” “The younger groups do not have savings,” said Hsu, “They spend money on luxury items. They can do that because they sill live with their parents. The older folks really save; they know what a hard time is. Their values are different and their outlook is different”
Doing business in China is complex, which makes it difficult to conduct business from remote locations. “You deal a lot with government or state-owned enterprises.” “People who successfully maneuver around the system are respected and admired in China,” said Hsu.
Over the past five to eight years second tier cities, located away from the metropolitan areas, have been emerging as secondary markets. There are about 14 second tier cities, but they are small only by comparison. They range in population from three to eight million.
Like most of the rest of the world, China is facing an economic downturn. Last year growth in China was nine percent; last quarter it was zero. “It literally stopped,” said Hsu, “their export market disappeared.”
“While we were losing 700,000 to 800,000 jobs from December to February, China lost 20 million jobs, and they have no social safety nets.”
Workers in the factories who were sending money home to families in rural areas, “had their jobs disappear over night. In many cases they lost their back pay, also.”
“That has serious political consequences because throughout history, every revolution started this way.”
China has “pulled out all the stops” to stimulate their economy. “They declared that the central government would do whatever it takes to generate eight percent growth,” said Hsu. That is what is considered necessary to prevent poverty.
With an economy that is one quarter of the US, China’s stimulus as a percentage of their economy is much bigger than that of the US. “The banks in China were ordered to open the front gates,” with $40 billion flowing to businesses. “There is no analysis of credit worthiness.”
The majority of the stimulus is going to infrastructure, so companies in the US that provide those kinds of products should do well marketing to China.
Another likely prosperous trade is in health care. China has a goal to have a clinic in every village in China.
Transportation is another national need. “They have 200 million people working in the cities, who go home on holidays, which generates a mass migration of 200-300 million people in a two to three week period.
Also the country needs to build three billion square feet of housing every year. That’s like building another Beijing every year and that will go on for the next 20 years, according to Hsu. That will grow 200 cities with populations of 1.1 million.
There is in China a demand for waste water treatment.
There is no right or wrong model for doing business in China, said Hsu, but it is important to keep up with day-to-day changes. One of the most difficult aspects of doing business is the lack of consistency in dealing with the government and that creates uncertainty.
US companies are winning in China, said Hsu. Sixty-three percent of companies that go to China are going after the China market, which counters the perception that US companies are going over to take advantage of cheap labor and ship back to the US. “That happens,” said Hsu, “but it’s not the majority of businesses doing business in China.”
