Chinese Society

Chinese New Year Is Upon Us — Rabbits in Red Underwear

Leave a Comment / February 6, 2011

Newyear

It is certainly the largest annual mass underwear change in the world. This week, as many as 100 million Chinese will take off their red underwear for the first time in a year and change into other colors. Meanwhile, 100 million other Chinese this week will pull on red underwear and wear no other color for the next twelve months.

It’s not fashion that rules this process, but supersition. This week is Chinese New Year. Wearing red underwear is meant to provide protection against misfortunes likely to target the one-in-twelve Chinese who this year will celebrate their 本命年 (“benming nian”), or birth year . This is a Rabbit Year. Everone born during a previous Rabbit year is likely going to take some precautions this year, including the red underwear. A red string bracelet or belt are also commonly worn by people during their birth year.

One’s birth year isn’t automatically going to be unlucky. But, there’s thousands of years of folk tradition that says people should extra mindful. This extends across most aspects of daily life. Many Chinese will try to avoid making larger life changes, or consequential business decisions, during their birth year.  I have one client, for example, whose founder was born 72 years ago, in a Tiger Year. The company is booming. The founder had numerous offers during 2010 to sell his business for a significant sum, or start work on an IPO. He chose to do nothing but wait things out. Now that Rabbit Year is dawning, he is ready to start considering his exit options. And, of course, changing back to a more neutral color of underwear.

As a Westerner, it takes some getting used-to, this notion that one’s birth year may come freighted with potential misfortune. After all, in all belief systems except possibly the Nihilists, one’s birth is considered a blessing.  But, in Chinese tradition, the anniversary of one’s birth year is a time when things can go especially awry. Or worse. The red underwear is meant to act as a kind of lightning rod, attracting an added flow of good luck during the year.

Red, of course, is associated with happiness, prosperity and good fortune in Chinese culture. Two of the more common sights in stores and on streets in China this time of year are crimson-colored envelopes and similarly-colored underwear. The envelopes, of course, are used to hold the cash handed out as New Year gifts to family and coworkers. The new underwear for men, women and children, in all sizes and styles,  is the flight suit for those about to traverse their birth year.

There’s also quite a lot of red underwear on sale this time of year in the US and Europe. But, it’s generally of the skimpy and sexy Victoria’s Secret variety, given by husbands and boyfriends as a Valentine’s Day gift. That custom is catching on rather quickly also in China, where Valentine’s Day is celebrated twice a year, on February 14 and also usually sometime in August (the date changes every year according to the lunar calendar), when the traditional Chinese version known as 亲人节  (“Qinren Jie”) falls.

Underwear is less commonly given as a Valentine’s gift in China. However,  fathers, brothers, husbands and boyfriends are supposed to buy red underwear for the women in their lives about to enter their birth year. Love in China is often expressed as a protective impulse.

I tended to view the mass changeover of one-twelfth of China to red underwear as a quaint superstition, one of the evermore scarce expressions of an antique and thoroughly unscientific traditional culture. But, over the last year, I saw at first hand the kind of mischief and harm that can target people during their birth year.

Last summer, I got word that another client of mine, one of my favorite people in China, was arrested while trying to cross into Hong Kong. He was accused of paying a bribe to a senior government official in one of China’s less developed inland provinces. He was taken from the Hong Kong border to a prison in the province’s capital, then held in detention for over three months while his friends and family raised the money to free him.

Under Chinese law, paying a bribe is treated more leninently than accepting one. But, it also signals rather emphatically the person has money.

I saw him soon after he got out. He was a shambles, gaunt, with a prison buzzcut and clothes that no longer properly fit him. I offered to help out his new venture, unrelated to the one that landed him in jail.

I invited him for lunch again a few weeks ago. He was his old self again, brimming with vigor and good cheer. As soon as the tea was poured, he proposed a toast, “To a happy Year of the Rabbit, and a quick end to the Tiger Year, my birth year.” We never discussed directly his time in prison, or even that I knew about his ordeal. He’s elated to be out of jail – and, by all appearances, almost as happy to be out of his birth year.

I glanced down at his feet.  He was wearing red sox.

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Toiling from Tang Dynasty to Today – Buying a House in Beijing

1 Comment / January 13, 2011

sancai16

How long would it take an ordinary Chinese peasant to save up and buy a nice apartment in Beijing? You’ll need to brush up on your dynastic history.

1,400 years ago, as the Tang Dynasty dawned in China, a peasant began farming a small plot of decent land 6mu (one acre) in size. Every year, in addition to providing for his family’s needs, he was able to earn a small profit by selling his surplus. His son followed him on the land, and maintained his father’s steady output and steady profit. Same with is children, and children’s children, through the Song, Yuan, Ming, Qing Dynasties into the Republican period and then the modern era marked by the founding of the People’s Republic in 1949, down to present day.

Some 280 generations later, there should now be just about enough in the family bank account for the family to pay cash for a new two-bedroom apartment in Beijing. This is assuming no withdrawals from the bank account during that time, and even more unlikely, no bad years due to floods, famine, locusts, rebellion.

I heard this calculation second hand, and so can’t check the figures. But, it certainly has a ring of truth about it. Property prices in Beijing particularly, but other large cities as well, have reached levels utterly disconnected from average earning levels, especially in rural China.  New apartments can now cost over USD$1 million. Prices continue to rise by over 5% a month, despite aggressive actions by government to curb the increases in residential property prices. According to the Wall Street Journal, “Housing prices in the U.S. peaked at 6.4 times average annual earnings this decade. In Beijing, the figure is 22 times.”

The collapse of this “housing price bubble” has been widely predicted for years now  — not since the Tang Dynasty, but it sometimes seems that way. The housing price crash was meant to be imminent two years ago, when prices were about 30% of current levels.

Still, they keep rising, most recently and most dramatically in second and third tier cities in China, places like Lanzhou, a provincial capital in arid Western China, where the cost of a 100 square meter apartment has doubled in price in the last year, to about $300,000.  Some apartment owners in Lanzhou earned as much profit  during 2010 from the sale of their property as a typical peasant in surrounding Gansu Province might make in a century.

My prediction is that housing prices may soon peak relative to incomes, but will keep moving upward. There are a few fundamental factors at work that raise the altitude of housing prices: rising affluence, China’s continuing urbanization and a dearth of alternative investment opportunities. Real estate, despite what can seem like dizzying price levels, is often seen to be a safer long-term bet than buying domestically-quoted shares.

Introducing property taxes, and allowing ordinary Chinese to buy assets outside China, would both alter the balance somewhat.  But, many a hard-working peasant is still going to need a thousand years of savings to join the propertied classes in Beijing.


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The Greenest and Maybe Cleanest Vehicle on the Road

6 Comments / December 28, 2010

scooter

Is this the zero-emissions green vehicle of the future? For the masses, possibly not.  For me personally, maybe so. It’s a battery-powered electric scooter, with solar panels for recharging during daylight hours.

I’ve become a big fan, and a minor authority, on battery-powered electric scooters. I’ve owned a few. A Chinese-made electric scooter was my primary form of urban transportation while living and working in Los Angeles until moving to China last year.

Though I never saw another one on the road in LA, I’m a passionate believer in this mode of transport. In China, electric scooters are almost as common as passenger cars, with upwards of five million sold every year. The streets and sidewalks are crowded with them. They run on lead acid batteries, the same kind used in car batteries.

The electric scooters sold now in China rely on plug-in battery rechargers. That’s the biggest drawback of driving one. Lead acid batteries can take up to eight hours to recharge. This new solar-powered recharger should solve that problem. The battery recharges automatically as you ride around, as long as there’s sunlight. Assuming the solar recharger works, this electric scooter becomes a street-legal perpetual motion machine, never needing, at least during daytime, to stop for a recharge.

I met the inventor, Zhao Weiping, at a trade exhibition. I could barely contain my excitement. We discussed the science, the capacity of the solar panels, and the potential to upgrade the batteries to lighter, longer-lasting lithium batteries. He’s only built prototypes so far. He expects the cost, for a base model, to be around Rmb3,000 ($440).

With lithium batteries, the price goes up to around $750. Lithium batteries take half the time to recharge.

Another benefit of lithium: the batteries weigh less than half lead acid ones. Less weight means less drag and so farther range on a full battery and faster top speeds.  Engineer Zhao guesses top speed should be about 50kph (30mph) compared to 30kph (18mph) for lead acid models.

To me, it sounds like the ideal form urban transport: zero emissions, reliable, fast enough to keep up with traffic, and will rarely, if ever, require mains electricity to recharge. In other words, zero cost per kilometer traveled.

It gets better: in much of the US, including California, you don’t need a driver’s license or insurance to drive an electric scooter, and you can drive it legally in bicycle lanes. Of course, few traffic cops know any of these facts. I was pulled over routinely in California, while riding my electric scooter. Eventually, I created a plastic-coated car card with all the relevant clauses of the state traffic code. I’d present it to traffic police, and they’d usually let me head off after a few minutes.

In LA, I drove a Chinese electric scooter upgraded with lithium. Top speed was about 24 mph. Recharging time: four to five hours. As commutes go, my 9-mile trip to work was about as pleasant and relaxing as any could be. Most of my route was along the Pacific Ocean, and then through some of the hipper areas of Santa Monica and Venice. When the roads were crowded at rush hour, I’d switch into the bicycle lane. You can park anywhere on the sidewalk, just like a bicycle.

The biggest hazard is pedestrians. The scooters are so quiet that people don’t hear it coming. I had a few near misses.

I never understood why so few in California ride electric scooters. I never saw another one on the road. California is certainly one of the most environmentally-conscious places on earth. Motorized transport doesn’t get any greener than electric scooters. Zero emissions, zero fossil fuels, zero direct carbon footprint.

Those green credentials were never my main reasons for riding an electric scooter. I liked the convenience, the tranquility, the absence of traffic and the sheer exhilaration of riding it.

Exhilaration, however, is instantly transformed into despair when your battery runs out of juice.  It happened to me a few times, when I miscalculated the range. Open throttle riding, going uphill, lots of stops and starts can all drain the battery rather quickly. The meter showing battery life is, at best, unreliable. When the battery is empty, the scooter will shudder once, then conk out completely.

Run out of fuel with an internal combustion engine, you call the AAA or find a gas station. Run out of electricity with an electric scooter and your only real choice is to push the vehicle home for recharge. I’ve had to do it more than once.

Engineer Zhao’s solar-powered recharger should make that problem less common, if not eliminate it altogether. At worst, if the battery empties, you park it and in daytime, come back in a few hours and drive it away. Limitless range should make for limitless enjoyment.

Yes, but will Engineer Zhao’s machine work? Talking with him, it’s hard not to be confident it will. The solar panels are powerful enough to keep the batteries recharged and light enough not to create a lot of extra drag. The only way to find out, of course, is to get one. I’m thinking now of commissioning Engineer Zhao to build me one, with lithium batteries.

If it works, I’ll help Engineer Zhao get venture capital funding to build his company. My gut tells me I’m not the only one who’d ride around on one, and that there could be a very big market in the US, Europe and China for this solar-charged scooter.

I don’t particularly relish the idea of driving any sort of vehicle on Shenzhen’s streets. Driving is chaotic. Accidents common. Pollution awful. There are no bicycle lanes. But, I’m prepared to put my money – and perhaps my health – on the line to prove this is a vehicle with a future and perhaps even a mass market.

Wish me luck.

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Good News About China’s Food Price Inflation: Chinese Peasants’ Time of Unprecedented Plenty

Leave a Comment / December 14, 2010

Bamboo painting from China First Capital blog post

Food prices in China, as everyone inside and outside the country now knows, are rising fast, in some cases by over 30% during 2010. The Chinese government puts some of the blame on speculators who are said to be buying large quantities of fresh food, holding it off the market and then profiting from price increases. There seems to be some evidence of this.

There’s no short-term fix for these price increases. The Chinese government has released for sale some of its food stocks. It is also urging peasants, and local cadres who govern rural China, to make sure more food is grown next year to increase supplies. The peasants probably won’t need any such encouragement.

The increases this year in food prices have done more, in a shorter time, to lift income levels for many of China’s 600 million peasants than any other single measure taken over the last 30 years.

There has never been a  better time, in China’s long agrarian history, to be a peasant. Fundamentally, food price inflation in China represents a colossal transfer of wealth from China’s more affluent urban areas to the rural hinterland where half of China’s population still lives.

If this lasts, it will narrow the gap in living standards and income levels between China’s cities and countryside. This is one of the overarching goals of the Chinese government. And yet, no one is applauding.

Instead, the Chinese central government has reacted with some alarm to the recent price increases. It knows that higher food prices are putting the squeeze on city-dwellers, including, of course, those in the capital Beijing and other major cities. In China, communist power originally took hold in the countryside, and a lot of party doctrine still speaks about its roots among the peasantry. But, political power today is firmly rooted in urban areas.  China’s political, economic and cultural elite all live in major cities, as do most of their friends and family. So, price rises effect this group directly.

When apples, the staple autumn fruit in most of China,  almost double in price, as they have this year, political leaders will soon hear about it. The fact that China’s apple farmers now have a lot more money in their pockets is not necessarily part of the political calculus.

Yet, it is undeniable that the fastest and most effective way to raise peasant living standards and real incomes is higher farm prices that don’t fuel overall inflation. There are signs that’s now the case, that the only area of significant double-digit inflation is in food prices. If so, this is unquestionably the best time in Chinese history to be tilling the land.

How long will this last? Of course, commonly, a spike in food prices leads to overall price levels rising as well. This can erode, or even wipe out,  the rise in income for farmers from higher food prices. Also, today’s high prices will certainly lead to more land being cultivated next year, as farmers chase the fat profits from today’s prices.

I was just in Jiangsu Province, in central China, and it seemed like most of the farmland is under plastic cover this winter, allowing peasants to keep growing and selling vegetables. Supply goes up, price comes down. Eventually.

How high are food prices at present? Looking around my local covered market, prices in the stalls for many fruits and vegetables are now as higher or higher than prices commonly seen in the US. Looking just at autumn fruit, apples are about $1 a pound; navel oranges around 60 cents; clementines about $1 a pound; bananas are 50 cents a pound. Meat prices have risen sharply.

Pork remains comparatively cheap at about $2 a pound, but chicken is quite a bit higher here. Garlic and ginger, the two fundamental staples of all Chinese cooking, are both at all-time highs of around $1 a pound.

So far, in my experience, higher food prices haven’t yet fed through to higher prices at restaurants, noodle shops or even the outdoor steamer wagon where I buy corn-on-the-cob and potatoes as snacks. This means restaurant margins must be hurting. One notable exception, McDonalds in China. They recently announced price increases to counter effect of rising raw material costs.  With about 900 restaurants in China, all in larger cities, McDonalds feeds a lot of people.

Wages are also rising very steeply in urban China, as is household wealth for anyone who owns property. This seems to be allowing most urban Chinese to absorb higher food costs without much of a fuss.

In other words, just about everyone across this country of 1.4 billion is doing much better, year by year. For now, the 600 million peasants are doing best of all. Viewed across the breadth of China’s long history, no less than across the last 30 years of unparalleled economic progress, this is a singularly welcome development.

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The Middle Kingdom’s Mighty Middle Class

Leave a Comment / November 18, 2010

Ming Jiajing from China First Capital blog post

China recently overtook Japan to become the world’s second-largest economy. China’s population, of course,  is ten times larger than Japan’s. So, per capita, China is still one-tenth as affluent as its Asian neighbor.

A far more important, if little noticed, economic trend is that China’s middle class is now far larger than Japan’s. Indeed, the Chinese middle class will soon surpass, if it hasn’t already,  America’s, and so become the largest middle class country in the world.

There is no standard definition of “middle class”. So, measuring the number of people falling within this category is an imprecise science. It generally refers to people whose household income allows them to enjoy all the comforts of life well-above pure subsistence: these include vacations, air-conditioned homes, the full assortment of labor-saving home appliances, personal transport, and sufficient savings to cope with shorter-term economic problems like unemployment or a health emergency.

In China, by my estimate, there are at least 250-300 million people who now fall into this category. This is an economic achievement of almost unimaginable scale. Thirty years ago, there was no “middle class” in China, and but for a tiny group of top or well-connected party officials, virtually no one in the country of 1.4 billion could be described as living above basic subsistence.

Today, China has more internet and mobile phone users than anywhere on the planet. It is the world’s largest market for new cars. Housing prices across the country, in most of the major cities, are at or above the average levels in the US.

These housing prices are a big reason for the swift rise in the middle class in China. With few exceptions, anyone who owns a home in a Chinese city can now be considered middle class. That’s because most urban housing now is worth at least $50,000-$70,000. In major cities like Shanghai, Beijing or Shenzhen, housing prices are now among the highest in the world, and so just about every property-owner is sitting on an asset worth well in excess of $100,000.

Most Chinese either own their homes outright, or have mortgages that represent less than 50% of the home’s current value. Even in more rural parts of China, there are tens of millions of home-owners who have equity of at least $20,000 in their home.

Unlike in the US, Chinese can’t easily tap into the wealth locked up in their homes by taking out second mortgages. But, the wealth effects are still very real in China. People know how much their home is worth, have confidence the price will likely continue to appreciate. So, spending habits can reflect this.

In fact, most Chinese have a better idea of the current value of their homes than anyone in the US or Europe. That’s because property is sold based on price per-square-meter, and everyone in China seems to know that current value of the square meters they own. The Chinese government has been trying for the last sixth months, with limited success, to moderate the fast rise in property prices across the country.  Most housing has appreciated by at least 15% this year.

Housing is the main bedrock of middle class status in China. But, salaries are also rising sharply across the board in the professional class (as well as those working in factories), putting more cash in people’s pockets. The stock market has also become a major additional source and store of wealth.

It’s a common characteristic of the middle class everywhere to feel a little dissatisfied, and a little anxious about one’s economic future and ability to remain among the more better-off. This is very noticeable in China as well. Many of China’s middle class don’t consider themselves that comfortable.

The pace of social and economic change is so swift, and prices for many middle-class staples like cars, foreign vacations and housing are so high,  that people don’t have a real sense of “having made it’.  They also fret about their retirement, about saving enough to put their kids through the best schools, about job security. In other words, they’re very much like the middle class in the US.

Middle class spending is the single most important source of economic activity in the US. This isn’t yet true of China, but each year, it will become more important. This reality should be at the top of the agenda for boardroom planning at companies in China and much of the rest of the world. China’s middle class will become a market not only larger in size, but in purchasing power, than America’s.

China’s very rich (it now has more billionaires than any other country except the US) and poor tend to be the focus on most of the reporting by the world’s financial press. They are generally blind to the most significant development of all, the emergence over the last ten years of an enormous middle class in China. Without a doubt, more Chinese join the middle class each year than in the US, Europe and Japan combined.

Remember, many of the most successful global businesses in the US over the last 50 years – Ford, McDonalds, Disney, Coca-Cola, P&G, Wal-Mart to name just a few – got that way by focusing originally on selling to America’s middle class. China’s middle class is fast becoming an even richer target.

Anyone selling services or products for the middle class ought to find a way to do so in China. Quickly.

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China’s Economy: From Red Light to Highlights

1 Comment / October 21, 2010

Cinnabar Enamel snuff bottle from China First Capital blog post

After 30 years of economic progress unparalleled in human history, China can rewrite the rules on which leading economic indicators are most important to track.  I want to nominate a new one: the rate at which brothels are converted to beauty parlors.

At least in my Shenzhen neighborhood, this indicator is certainly at an all-time high. In the last four months, two rather seedy massage and KTV parlors have undergone very lavish renovation and reopened as large, expensive, multi-floored hair-dressing salons.

The clear implication: you can make more money in China these days selling perms and dye jobs than selling sex. This is an economic change in China of historic, if under-appreciated, importance.

Shenzhen has long had a reputation as one of the red light capitals of China. Some of the reasons: proximity to Hong Kong, a transient population made up largely of economic migrants, a local government with more of a laissez-faire attitude than elsewhere in China.

I can’t imagine anyone but the local police are keeping count, but I’d guess there must be thousands of places in the city offering sex for cash. These range from tiny storefronts with five to ten girls in folding chairs, to all manner of sauna, massage and KTV joints, most, but not all of which, augment their more legitimate offerings with the paid option to take one of the hostesses home with you, or do a little groping on the premises.

Or so I’m told. I know it may sound either prudish or disingenuous, but I’ve never been a customer of one of these places. I do, however, marvel at the variety and number of places selling sex here. The five-minute walk from my house to the local supermarket takes me past two big neon-lit places, called 会所, or “clubs” with touts out front and some heavily made-up ladies within. Down two smaller alleys are small storefront brothels.

In the building where I live, one of the fancier ones in my neighborhood, business cards are slipped under my door most every night offering “home delivery services”. They stress the a variety of women available, including  nurses, college students, migrants, mistresses, foreigners.

This is the part of Shenzhen’s sex trade I most deeply object to. The cards are put under every door. The photos on the card are of naked women.  My next-door neighbors include Chinese families with young kids. It’s unseemly, and I’ve complained numerous times to the doormen, but they claim not to know who is responsible for distributing the cards. My guess is they are paid to look the other way.

The economics of hair-dressing are certainly more favorable than the economics of prostitution. It’s not unusual for a woman to spend Rmb200-300 or more on a haircut and shampoo. Get your hair colored and the price can double. Though there are already dozens of hair salons in my neighborhood, they all seem to be jam-packed at all hours of the day. That never looks to be the case of the places selling sex. They always seem empty, over-staffed and under-patronized.

One thing hairdressers and brothels have in common,  the busiest time is 9pm-1am. Hairdressers, most of whom are men, earn a pretty good living, making around USD$1,000 a month. But, they work long hours, usually 12 hours a day. Most of the customers are women, but these places also cater to men. I pay Rmb 50 for a haircut and no shampoo. That’s a little less than the cost of a haircut at the joint I used to go to in LA’s Koreatown.

Every new beauty parlor that opens is confirmation of some larger economic trends in China.  Women have more disposable income, and more of an inclination to spend it on fashion, cosmetics, or a new hairstyle.  Prices are quickly reaching levels similar to those in the US. In Shenzhen, a young woman can now easily earn as much every month sitting at a desk in an office as sitting in a storefront brothel. That is probably a change from a few years ago.

China’s economy is changing quickly from export-dependence to a reliance on the domestic market, from dominance of manufacturing to the rise of the service sector. In my part of Shenzhen, what’s changing most quickly: who is serving what to whom for how much.


How One Million People Spent a Perfect Autumn Day in Shanghai

Leave a Comment / October 17, 2010

haibao

The most crowded place in the world today is a few miles from where I’m now sitting. More than 1 million people poured into the Shanghai Expo today, on a beautiful autumn afternoon, with bright blue skies and 70-degree temperatures.

It was almost certainly the busiest day of the Expo, beating yesterday’s record.  Once today’s final visitor count is in, the crowd will certainly set some kind of record for most people paying on a single day to visit a single attraction.

If today’s visitors all lined up in an orderly queue (which they almost certainly did not do), today’s crowd of Expo visitors would stretch for about 500 miles, or about halfway to Beijing.

Even with a typical daily crowd one-third that large, the lines inside the Expo often stretched beyond the patience of many. Waits of two to three hours to enter the most popular pavilions were not uncommon. With a crowd twice as big as usual, my guess is that the other record broken today was for most people waiting the longest, on some of the longest lines, displaying the greatest patience.

Besides the perfect weather, the other reason for today’s enormous crowd is that today is the next-to-last Sunday before the Expo closes to the public. It opened almost six months ago, on May 1.

I was in Shanghai today for a finance conference. As I rode the metro in mid-afternoon through the center of the city near the Expo, it seemed like the +1 million visitors were all trying to jam their way onto my subway car. In almost 30 years of visiting the city, I’ve never seen it so thoroughly and prodigiously congested.

At Rmb100 per head, the Expo’s ticket income today should approach $20 million. Drinks, food and souvenirs should lift the daily take above $50 million. That’s probably about 0.1% of the total cost of staging the event, including all the new urban infrastructure built to support it, including six new subway lines and a major new airport terminal. It seems money well spent.

On a day like today, Shanghai is an old city exquisitely renewed, a perfect playground for the millions who are converging on the Expo, or strolling its main shopping streets and colonial-era alleyways.



Big Economy, Small Cash

4 Comments / October 7, 2010

100 yuan notes

 

How’s this for a monetary paradox: the world’s fastest-growing major economy, the second-largest economy in the world, with more billionaires than any country except the US, has a currency whose highest denominated bill is worth less than that of any developed country in the world, as well as many of the poorest ones. 

We’re talking, of course, about China. The largest denominated bill is the red 100 yuan note. At today’s exchange rate, it’s worth about $15. It’s been the largest bill in circulation for the last eleven years. During that time, China’s economy has more than tripled in size. ATM machines have become pervasive. Prices for many things have reached American levels. 

Credit cards are still rare. Chinese do most of their buying, even of big ticket items, in cash. It’s not uncommon, for example, to pay for cars and houses completely in cash – using enough cash to fill either the car trunk, or a kitchen refrigerator. Because hospitals in China take cash and demand upfront payment before any treatment, most Chinese keep a stash of emergency cash at home of many thousands of renminbi.

Among the affluent Chinese bosses I know, it’s common to carry both a wallet and a kind of “guy purse” where they keep Rmb30,000-Rmb50,000 in cash.  It’s like carrying around a small brick  — and just as obvious. 

Next door to me in Hong Kong, the highest bill is circulation is HKD1,000, worth over eight times the 100 yuan note. In Taiwan, the biggest bill in circulation is NTD2,000, worth five times more than the 100 yuan note. In Singapore, it’s a $10,000 note. To use renminbi to get one, you’d need 500 of the 100 yuan notes. 

For lots of reasons, macro and micro, China urgently needs larger denominated currency. Yet, it’s very unlikely to get it anytime soon. 

A main reason, as far as I can determine, is a justifiable fear of mass counterfeiting. In China, counterfeit bills are already rife. Before moving to China, I never knowingly handled a counterfeit note. Here, I’ve already twice been given counterfeit bills as change, and then got stuck with them. 

You’d think, of course, that most of the counterfeit Chinese bills would be the 100 yuan note. In fact, most of the fakes in circulation are 10 and 20 yuan notes, each worth so little it’s hardly worth the expense and risk of producing the forgeries. 

What’s going on here? Though it’s the highest denominated bill, the 100 yuan note has a very unusual pattern of circulation. It’s never given as change, since it’s the largest bill. As a result, individuals get their 100 yuan notes almost exclusively direct from the bank, either an ATM or at the counter. These bills are usually new, or nearly new, and all are checked to make sure they are genuine. 

When you then use the notes, they are usually checked again by the receiver to be sure they are not counterfeit. Since they can’t be used as change, whoever got the 100 yuan as payment will almost certainly return them to the bank. Any bills that are not in perfect condition get scrapped. This is particularly true in larger cities. One result is every time I go to withdraw money from an ATM, I’ll get only brand-new bills. Even in the rare cases when I’ve been given a lot of 100 yuan notes by someone, usually as repayment, they are also almost always in mint condition. 

If China ever did introduce a 500 yuan note (worth about $65), then the 100 yuan notes would start to be used as change. Counterfeiting would almost certainly explode. The incentives, compared to today, would be overwhelming. The logistics needed to combat it almost incomprehensible. Most stores, even small ones, have machines at every cash register to detect counterfeits. But, lots of commerce in China is still hand-to-hand, in wholesale and retail markets as well as street vendors. 

There’s no realistic way to protect these tens of  millions of small businesses and traders from the punishing risks of getting stuck with phony bills.  When the cost of wrongly accepting a single fake bill, as now, is usually 10 yuan ($1.50), it’s unfortunate, but manageable. If it becomes $15, it’s easy to foresee that these tens of millions of businesses would refuse to accept 100 yuan notes from customers. The result: lots of disruption to established patterns of trade across all of China. 

At its current pace, China’s economy will double again in the next seven years. Will the 100 yuan note still be the largest in circulation then? My money says it will be. 

 



Qinghai Province – The Biggest Small Place in China

2 Comments / October 2, 2010

Taersi

In most things to do with China, the “law of big numbers” applies. A population of 1.4 billion mandates that. So, whether it’s the fact there are over 50 cities larger than Rome, provinces with populations larger than any European country, or that more of just about everything is sold every year in China than anywhere else, the reality of China’s huge population is always a hulking presence.

Except for Qinghai Province. Here, the numbers are so small Qinghai can seem like one of the Baltic States. The province is a little larger than France, yet has a population of only 5.2 million, or 0.3% of China’s total. The capital city, Xining, where I’m now writing this, has about one million residents. Tibet to the south and Xinjiang to the north are both autonomous regions, rather than provinces. Both are far more well-known and talked-about, both inside China and out, and benefit from much more investment from the central government.

Qinghai is unlike anywhere I’ve been in China. It is so empty as to be almost desolate. Xining is in the midst of a very rapid transformation from a dusty low-rise backwater to a more obviously modern Chinese city, with high rises, two new expressways, broad boulevards and shiny new shops selling brands familiar in other parts of the country. It sits alongside a tributary of the Yellow River, wedged like a sliver between low barren brown mountains.

Xining is also the most conspicuously multi-cultural city I’ve been to in China, with a Han majority sharing the city with a large contingent of Tibetans, and a very significant population of Hui Moslems. The Dongguan mosque, on the city’s main street, is one of the largest in China. As many as 30,000 people can worship there. Every twenty paces or so you’ll pass a small brazier with a Hui cook barbecuing lamb kebabs.  Most also sell yak milk yogurt. It’s delicious, in case you’re wondering.

The Tibetans are more concentrated outside Xining. Qinghai makes up most of the Tibetan region of Amdo, and much of the province’s landmass is inhabited by Tibetan herdsmen. The current Dalai Lama was born not far from Xining, and had some of his first schooling at Kumbum Monastery, a 450 year-old establishment that has long been among the most important sites of religious worship and study for Tibetan Buddhists.

Kumbum is a half-hour drive from Xining.  I’ve wanted to go there for about 30 years, and finally got the chance on this trip. I always felt a pull towards Kumbum because it was established to venerate Tsongkhapa, the founder of the Gelugpa tradition in Tibetan Buddhism. I’ve lived for the last 15 years with a beautiful thangka of Tsongkhapa, and hang it near where I sleep. Here it is:


Tsongkhapa

If I had a patron saint, it would be him. Tsongkhapa was born where the Monastery now sits, in a small mountain village. The Monastery spreads lengthwise about one mile up a hillside. At its height, it was home to 3,600 monks. Now there are said to be about 500. A lot of the more ancient buildings were destroyed during the Cultural Revolution, and have since been rebuilt. There are also some newer structures in traditional Tibetan monastic style, including one built with a donation from Hong Kong’s richest man, Li Ka-shing.

Tibetan pilgrims circumambulate the important buildings, do their prostrations, and leave offerings of money and butter. They share Kumbum with Chinese tour groups, who are for the most part respectful, attentive.

After visiting the Monastery in a steady drizzle, I went to see a doctor at the nearby hospital. I was feeling just fine, but for a little sleepiness from the high altitude.  I’ve had a long, intense interest in Tibetan medicine, and the hospital here is staffed by lamas educated at Kumbum and graduated with the equivalent of a PhD in Tibetan medicine.

I saw a physician named Lopsang Chunpai, dressed in maroon and yellow monastic robes. He took my pulse, pronounced me healthy, and prescribed a Tibetan herbal medicine called Ratna Sampil, a combination of 70 herbs that is compounded at the hospital. According to the package, it’s used “clearing and activating the channels and collaterals”.

Though I saw only a very small part of it, Qinghai struck me as an especially lovely place:  a wide, open and arid plateau not unlike parts of the American West. Even accepting the cold winter (with temperatures of 20 to 30 degrees below zero centigrade), it’s hard to understand the high vacancy rate here. It’s population density, at 7 people per square kilometer, is 0.3% of Shanghai’s.

It’s empty, of course, because comparatively few Chinese have emigrated here. That seems likely to change. The air is clean, the economy is booming and the infrastructure improvements of recent years are integrating the province much more closely with the highly-populated parts of China to the east.

Neighboring Tibet and Xinjiang have experienced large Han Chinese migration over the last 60 years. Not so Qinghai. Geography is destiny.  Qinghai, unlike Xinjiang and Tibet, does not border any other country. It has far less military and strategic importance. Xinjiang borders Russia and Tibet borders India. China has fought border wars with both.

Xinjiang and Tibet have also both recently had some serious ethnic conflicts, including anti-Chinese riots in both places in the last two years.  Although its population is about 20% Moslem and 20% Tibetan, Qinghai has stayed peaceful. It is China’s melting pot.

Qinghai is rich in mineral resources, including large seams of high-grade coal. As the transport system improves, more Chinese will migrate there to work in mines. Xining, as small as it is, is the only proper city in all of Qinghai.

The ostensible reason for my visit was to speak at a conference on private equity. The provincial government has a target to increase the number of Qinghai companies going public. The mayor of Xining, who I met briefly, was until recently a successful businessman, running one of the province’s largest state-run companies.

I met a few local entrepreneurs and visited one factory making wine from buckthorn berries, using technology developed by Tsinghua University. It’s a healthier, lower-proof alternative to China’s lethal “baijiu”, the highly alcoholic spirit, mainly distilled from sorghum,  that is widely consumed across China.

Up to now, as far as I can tell,  there’s been no private equity investment in Qinghai. I’d like to change that. It’s a special part of China. Though it’s statistically one of the poorest provinces, Qinghai will continue every year to close the gap. More capital, more opportunity, more prosperity — and more inhabitants. This is Qinghai’s certain future.


China’s Mobile Phone Market Is Maxxing Out on Growth

3 Comments / September 23, 2010

Portrait of Kangxi Emperor from China First Capital blog post

During the first eight months of this year, 547 million mobile phones were sold in China, a 36% increase over the same period last year. At the current rate, more mobile phones will be sold in China this year than there are mobile users. In other words, on average, everyone of China’s 780 million mobile subscribers will buy a new mobile phone this year.

Can this possibly be true? Outside of China, mobile phone sales are basically flat, with most of the growth now coming from sales of smartphones like those made by Apple and HTC. Based on the current sales pattern, China will account for over 60% of all new mobile phone sales in 2010.

What is happening in China that could account for phenomenally high growth rate? I’m at a loss to explain it. Anecdotally, I can’t find much evidence of this remarkably high rate of new phone sales.

Most Chinese I know are using phones that are at least a year old. Nokia phones are particularly common in my circle. Overall, Nokia is still the biggest selling mobile phone brand in China. But, its sales in China are not doing very well, and the company is losing market share.

China’s Ministry of Industry and Information Technology compiles the statistics on Chinese mobile phone sales. They do a professional job gathering and transmitting data on China’s mobile market. So, I have no reason to doubt the basic accuracy of the numbers. The absolute number may possibly be off, but the 36% growth rate is probably correct.

If so, the larger question may not be one of accuracy, but of sustainability. In other words, if mobile phone sales are growing by 36% a year, is there any way that rate of year-on-year growth could continue into 2011 and beyond? I have severe doubts about this. For one thing, if the 36% annual growth rates continued through 2012, overall annual sales will double from the current high level. If so, every Chinese mobile subscriber on average would end up buying two new mobile phones a year. That, as the British like to say, “beggars belief”.

It may well be that the fantastically high growth rate we now see in China will begin to plateau very soon. If so, the overall market dynamic will change from one of rampant growth, in which even the weakest players register growth every year, to one where a company’s ability to generate sales growth will comes mainly from increasing market share.

In other words, from a manufacturer’s standpoint, the market changes from one of absolute growth to one of relative growth – or loss. It will happen soonest for products like mobile phones, where the market is reaching saturation.

There is still plenty of organic growth left for other fast-growing items like new cars, computers, white goods, and a full range of brand name products, from laundry detergent to Italian suits.

I bought a new phone recently,  an HTC Legend, running on Google’s Android operating system. But, it didn’t register on the Ministry’s figures.

Like a lot of people living in Shenzhen, I bought my new phone in Hong Kong, where prices are as much as 35% cheaper, and there’s far more certainty of getting a phone with all its original circuitry intact. It’s not all that uncommon for brand name phones in China to be doctored before sale. They look authentic on the outside, but have some cheaper, replacement parts within.

HTC is still a niche brand in China, though with very ambitious plans for growth over the next year. I bought the HTC in large part because the company is an investor and partner of one of my clients.  I like the phone, and like the fact it’s not an iPhone.

I have nothing against the Apple product. I just prefer, in phones and most other things, to choose brands that aren’t already dominant in their market.

Apple phones, either genuine or knockoff, are far more common in China than anywhere else in the world, as far as I can tell. Apple just announced plans finally to begin selling its new iPhone4 in China, months after it went on sale in the US, Europe and much of Asia. The price is still well above the level in Hong Kong, but I have no doubt the phone will sell well.

Apple computers are still very rare in China. There are very few places to buy one. This is a major untapped opportunity for the California company, since anything with the Apple brand is going to sell well in China. Apple has begun opening retail stores in China, but as of now, there are only two, one each in Beijing and Shanghai.

Apple is certainly one of the companies that should continue to thrive in China’s mobile market, even as it shifts from absolute to relative growth. HTC too. As for the others, both global and domestic brands, it’s going to be a dogfight.


Wanted – Great Retail Food Businesses in China

4 Comments / September 7, 2010

Xuande detail from China First Capital blog post

One of the world’s great discount retailing entrepreneurs, Theo Albrecht, died recently. He and his brother built Aldi into one of the world’s largest discount supermarket chains, with consolidated sales likely of over $50 billion. Along the way,  Theo also managed to buy what was then a small food store in Southern California, Trader Joe’s,  and then build it into one of the best and fastest-growing food retailing companies anywhere. 

Where is the Theo Albrecht of China? The question is not an idle one. No country can now match in absolute numbers or recent financial success the entrepreneurs of China. There are great home-grown Chinese companies everywhere, in just about every industry. But, not in food retailing. 

This is surprising. Food, of course, is the main thread, along with family, that weaves together Chinese civilization.  As nowhere else, people’s lives are organized around shopping, preparing and consuming of food. While it’s no longer a primary form of greeting as it was until about a century ago, the phrase “吃饭了吗？”, or “Have you eaten?” is still spoken or written by SMS more times each day in China than any other. 

The most successful retailers in China are, for the most part, all Western companies: Wal-Mart, Ikea, Carrefour, Zara. The most successful fast food chains: McDonalds and Kentucky Fried Chicken. There are Chinese competitors, some of which are quite good. But, in food retailing, the picture is bleak. There are lots of supermarkets in China, modeled on the American style, but none I’ve been to does anything special.  Certainly, there is no Chinese food store that can compare with the two chains Theo Albrecht built. 

I’ve yet to find a Chinese food chain that even attempts to be a source for quality discounted products, the formula Albrecht’s stores do so well. One result: supermarket food prices in China tend to high, considering income levels. There is no real low-end competition. 

Chinese love bargains at least as much as Germans and Americans. The Chinese market couldn’t be bigger, or more primed for a great discount food retailer to enter. The fact none has yet to surface in China is a source of real bewilderment to me – in part, because I’d likely be a frequent customer. 

A Chinese version of Aldi would be a great place to start. For those who’ve never been, Aldi stores tend to be much smaller than a typical supermarket. Everything about an Aldi store is bare bones – the merchandise is mainly stacked in corrugated cardboard shipping cartons, placed in pallets on the floor.

Aldi stores have a narrow range of mainly brand-name food products, things like cereal, detergent, beer, processed meats. Prices are low, probably around 25%-40% below prices in full-range supermarkets. Customer service is all but non-existent. Everything about the store screams at you: “come here to buy stuff cheap, not for the ambiance”. 

Aldi’s retail model, with its small stores and efficient use of floor space,  would work well in Chinese cities, where real estate prices are high. A limited range of only the most-commonly bought products is also suited to China. The Chinese market is simpler. People haven’t yet developed a preference, as many Americans have, for stores stocking 200 different permutations of potato chip. Margins at a Chinese Aldi would grow consistently over time. As the number of stores grows, the company would have more buying power and greater leverage with the brand-name manufacturers. 

If anything, a Chinese Trader Joe’s might do even better. Again, the store size is smaller than a typical supermarket. But, where Aldi focuses on selling mainly well-known global brands, almost everything sold at Trader Joe’s is the store’s “own brand”.

The Trader Joe’s products are all high-quality, as good or better than national brands. But, the prices can be much lower than branded products, since Trader Joe’s isn’t spending/wasting anything on marketing or advertising. That’s the retail proposition Trader Joe’s makes to its customers: “If you don’t mind buying our brand, we’ll sell you better stuff at lower prices than you can buy anywhere else”. 

If going to Aldi is like a trip to a supermarket stock room, a visit to Trader Joe’s is far more pleasant. The stores are always in nice areas, with helpful and friendly staff, free samples, wide and well-organized aisles. The customers seem overwhelmingly affluent and educated. They shop at Trader Joe’s because they like and care about good food, but don’t want to pay an unnecessary premium for a big brand. 

Trader Joe’s sells both staples like coffee, pasta, cooking oil, bread, milk, and also prepared foods, including fresh salads and soups. Non-food items include detergent,  vitamins, pet food, plants, and flowers. Every Trader Joe’s I’ve been to is crowded at all hours of the day. According to Businessweek, the company has the highest sales per square foot of any food retailer in the US. 

High quality “own brand” food items at lower prices sold in a nice environment is a retail idea I think would work very well in China’s major cities like Shanghai, Beijing, Shenzhen. There’s a big market for higher-quality food products. What’s more, big brands have only been around in China for about a decade. So, it should be comparatively easier in China than in the US to get people to support a single brand that offers top quality across a range of products. 

The Chinese market is ready. The big mystery is why no Chinese entrepreneurs have attacked it.  


Why China’s Retail Prices Are Surprisingly High

6 Comments / August 30, 2010

Ming Dynasty porcelain detail from China First CApital blog post

Making things in China is cheap. Buying things in China is not.

People living elsewhere, or ones like me who move here, will be rather surprised  to find out how expensive prices are for many of the more familiar brand-name products on sale in China. At current exchange rate of 6.78 renminbi to the dollar, many goods and services in China are sold at prices similar to the US.

Years ago, the Economist came up with their “Big Mac Index” as a way to measure real exchange rates. In their most recent survey, the renminbi looks 48% undervalued, because a Big Mac costs $1.95 in China, compared to $3.73 in the USA.


Big Mac Index
Source: The Economist

Of course, those prices tell only part of the story. Chinese wages are about 1/15th America’s. So, while it takes an average working American about ten minutes to earn the money to buy a Big Mac, in China, a reasonably well-paid office worker would need to toil about about four times as long to earn the Rmb 13 needed to buy a Big Mac. By this measure, the price of a Big Mac in China, to truly equal the price in the US, should be about 33 cents, and therefore the exchange rate should be over Rmb35 to the dollar.

Of course, the renminbi is never going to get that low. In fact, the overwhelming likelihood is that renminbi will get much stronger than the current rate of 6.78 to the dollar. Upward pressure comes from China’s $2 trillion in foreign exchange reserves and large balance of trade surplus with the US. As the renminbi rises in value, the prices of many goods in China will become even higher, when translated into dollars, than those in the US.

How expensive are things in China? To find out, I did a little comparison shopping at the Wal-Mart closest to my office in Shenzhen. As in the US, Wal-Mart in China is highly successful, and got that way by offering “low everyday prices”. Considering the big gap in income levels between US and China, it would be a fair assumption that prices at Wal-Mart in China would be appreciably lower than those at Wal-Mart in the US.

But, that assumption would be wrong, for the most part. Here’s a rundown of prices on some popular branded products at my local Shenzhen Wal-Mart — prices below are in renminbi and current dollar equivalent at prevailing exchange rate. Quite a few are Procter & Gamble products. P&G are very strong in China, and its products are often market leaders. As in the US, P&G enjoys a close relationship with Wal-Mart.

 

PricesSource: Peter’s Shopping

 

A few days after my visit to Wal-Mart in Shenzhen I flew to New York on business. In between meetings, I did some comparison shopping. 

Wal-Mart is the largest retailer in the US, but does not have any stores in New York. One reason is New York City’s unfriendly labor laws that would make it hard for Wal-Mart to operate in New York without unionized workers. Instead, I checked prices at local Food Emporium supermarket, Walgreens and CVS. 

While there are some pretty good deals in China, for example Heinz Ketchup and Coke, most things on the list are in line with prices in the US.  In other words, they do not reflect the vast differences in average earnings and therefore purchasing power.

Chinese workers manufacture wholesale, but buy retail.

Prices in China are high, in part, because there is a VAT of 13% on most things. More important, retailing in China is not nearly as efficient as it is in the US. While Wal-Mart is successful in China, it doesn’t enjoy anything like the market share it does in the US. Smaller, but my guess is, far more profitable. Wal-Mart faces very limited low-price competition in China. Most stores are of the Mom-and-Pop variety, which keeps overall prices high. Urban real estate is also expensive, and that also has an underlying impact on consumer prices.

In China, it’s easier to make money selling than manufacturing. Retail margins are higher and less squeezed than they are in the US. This will likely be true for many years to come. For Chinese consumers, especially the +40% who live in cities, they will likely continue to pay prices on par with those in the US, while earning appreciably less.


China’s Booming Hami Economy

1 Comment / August 12, 2010

dude with Hami

Xinjiang is a big place, with a land mass the size of Western Europe. It occupies 1/6th of China’s territory, yet contributes only 1.5% of its population. I think I now know why it’s so empty. All that space must be devoted to growing Hami Melons.

This fruit is Xinjiang’s most popular export to the rest of China. It’s high season now. Even here in Shenzhen, as far as one can travel from the melon-growing precints near the Gobi Desert in Xinjiang, the large Hami melons are pervasive – in fruit stores, supermarkets, pushcarts. You can also find them piled high on many streets all over the city, with each Hami hoard minded by a guy from Xinjiang with a long sharp knife and a small scale.

guy

The melons are generally oval-shaped and weigh about 10 pounds each. I’ve bought segments of ones weighing twice that. The most popular way to eat the melon is as a snack on the street. A tall thin slice on a wooden skewer sells for Rmb 1.

For those who haven’t had the pleasure, a Hami tastes a lot like cantaloupe, but the flesh is much crunchier, almost like an apple’s.

This time of year, across China, Hami crowds every other fruit out of the marketplace. I can’t find any statistics on Xinjiang’s total production, but my guess would be it runs to the millions of tons. Imagine the logistics: a market of 1.4 billion all simultaneously ravenous for your perishable product, grown on the fringe of a desert in one of the most distant, infrastructure-starved corners of the country.

Just to supply the Chinese market must occupy the full-time summertime efforts of tens of thousands of farmers, packers, and shippers. The melons are grown, boxed and then shipped by road and rail to every corner of China. It seems like for every 100 melons exported from Xinjiang, one local Uighur must accompany the shipment, to run the impromptu sidewalk stalls selling the fruit.

If other parts of China also grow the melon, I’m not aware of it. To find buyers, they would probably have to falsely label their melons as coming from Xinjiang. In China, Hami belongs to Xinjiang the way champagne belongs to the Champagne region of northern France.

Shenzhen probably has a larger market for Hami, on average, than many other parts of China. It’s a rich city, and Hami melon is not cheap. Bought by the kilo, the price runs to around Rmb8 to Rmb 12, or about 70-90 cents a pound. I’m buying around 10 kilos a week.

You can also find Hami this time of year in Los Angeles, usually at Persian grocery stores. Parts of Southern California’s desert are similar to Xinjiang’s Hami growing region. But, the fruit is very much a minority taste in the US. It’s likely to remain that way. As big as it is, Xinjiang will never be able produce enough Hami to satisfy fully Chinese tastes, let alone an export market.



Bad Policy, Bad Advice and Bad Reporting from the US on Dollar-Renminbi Exchange Rate

2 Comments / June 27, 2010

Yaozhou bowl in China First Capital blog post
I don’t know the direction of the dollar-renmibi exchange rate. But, I do know most of the American press, led by the New York Times and Washington Post, got snowed by the announcement last weekend that China would introduce new “flexibility” in its exchange rate.

The immediate media reaction – and that of the Obama administration – was one of hosannas and smug approval. The tone of most coverage was along the lines, “the Chinese have finally seen the error in their mercantilist ways and will now allow their currency to appreciate strongly against the dollar, leading to a new golden age of manufacturing employment in the US.”

A week has gone by and the renminbi has appreciated by exactly 0.5%.  So, a $100 item made in China that previously cost Rmb682 will now cost an importer Rmb685, or $100.50. Factory managers in the US may be waiting for awhile yet before the flood of orders arrives from China.  The President’s union buddies will also not soon see much of an uptick in their membership rolls.

For those without short-term memory impairment, this is, of course, the second time in two months that US press and the Obama administration loudly predicted the imminent upward revaluation of the renminbi. In April, a flurry of reporting, loudest and strongest from the New York Times,  announced the Chinese government was at last ready to accede to US demands and let the renminbi rise.

That time, the press articles were timed to coincide with a visit by the US Secretary of Treasury, Timothy Geithner, to Beijing. He was there, if the Administration and its media allies were to be believed, to talk tough and get the Chinese to fall in line with American wishes. Discernible results? Zero.

This time around, the reporting coincides with the G-20 Summit meeting in Toronto, where we are told, President Obama will use his intelligence and oratorical brilliance to persuade Chinese leader Hu Jintao to do his part for the sagging US economy. Likely results? We’ll see, but the signs are that China will continue to make policy decisions with its own interests to the fore.

There is much both wrong and economically illiterate about all this US pressure to revalue the renminbi. Start with the fact the Chinese currency is not significantly undervalued. Yes, it is tied to the dollar. So are many other currencies with which the US trades, including Mexico, Taiwan, Russia, Singapore, Thailand, Saudi Arabia. The renminbi’s formal peg with the dollar ended in July 2005. It is true that the renminbi, if it were fully convertible and freely floating, would likely appreciate against the dollar. But, by enough to really make an impact on US manufacturing employment? Hardly.

The biggest benefit to China of letting the renminbi rise against the dollar would be to lower the renminbi cost of China’s huge imports of oil, iron ore and other core dollar-denominated raw materials. Weighing against this would be falling margins at many of China’s exporters, which would ultimately have an impact on manufacturing employment.

Creating and maintaining jobs is a paramount concern for a country whose labor force grows by millions every year, and where there is no “social safety net” as in the US.  Fact: every year, six million more Chinese join the migrant labor force, according to recent report by China’s National Population and Family Planning Commission.

It’s a mistake shared by many Americans that at the current exchange rate, China is some kind of low-cost paradise for people with dollars. I live here. Prices here are not low. In fact, most things in China, with exception of fresh vegetables and public transportation, are either on par with US prices or higher.

Most fruit is generally more expensive here, even at the proletarian outdoor market where I do a lot of my shopping. Same goes for beef, chicken and most everything else you fill up a supermarket cart with. Gas, automobiles, computers, TVs, brand-name products are all higher in China than in the US.

I’m writing this in my local Starbucks in Shenzhen. And while this is hardly a perfect bellwether, the cheapest cup of regular brewed coffee here costs Rmb 15, or $2.20. A cappuccino? Rmb 25, or $3.65.  The place is jammed, as it always is, from noon to midnight. Not a seat in the house. Starbucks has over 350 stores in China and growing fast.

Not that long ago, the renminbi was pegged at 8.2 to the dollar. Has this 17% appreciation done anything to impact the decline of manufacturing employment in the US, a decline that began over 30 years ago? No. Will another 17% appreciation of the dollar reverse this trend? I very much doubt it.  Instead, what will likely happen is prices for many products in the US will rise sharply, since so much of what America likes buying is made here.  This will lead to higher unemployment, lower growth and hit hardest the poorer Americans President Obama claims to champion.

Make no mistake: if Chinese prices rise, this will not create huge new opportunities either for US manufacturers to reconquer the domestic market or allow lower wage countries like Bangladesh, Nigeria, India, the Dominican Republic or Peru to increase dramatically their exports to the US. Those countries can’t now, nor will they ever in my view, manufacture products to match the quality at the same price of those made in China, even if the cost of Chinese made products rises 15%-20% or more.

True, an economics professor’s models would argue otherwise, and President Obama is surrounded by economics professors. The models are plain wrong. Some textile imports from places other than China will rise. Not much else.

So, the real world result of the “strong renminbi” policy: greater economic hardship in the US.  But, won’t ordinary Chinese benefit from lower import prices? Perhaps a little, but not in any way that will create the desired outcome of much higher manufacturing employment and exports in the US. Maybe the Washington state apples and cherries in my supermarket will become a little cheaper, and become only twice as expensive as they are in the US. Again, not overly likely.

China’s current currency policy has its benefits and drawbacks. The benefit is mainly greater predictability for exporters, which has been somewhat helpful during the economic crisis of the last two years in China’s largest export markets of the US and Europe. Even with the stable exchange rate, a lot of exporters in China went bankrupt over this period, because of a collapse in orders from the US and Europe.

The biggest drawback of current exchange rate policy: $3 trillion in foreign exchange reserves accumulated to soak up all the dollars still pouring into the country. This money is not being put to any direct productive use to improve China’s economy. A higher renminbi will not alter that calculus much, if at all.

I’m troubled in many ways by the direction of American international financial policy. The Obama Administration finds it far easier to scapegoat China’s exchange rate than put their focus on the deepest source of American economic malaise: runaway spending and budget deficits in Washington, with the inevitability of large tax increases to follow.

It’s not likely to happen, but here’s what I’d most like to see is the next time the US media starts braying for a higher renminbi. Chinese newspapers respond with articles, quoting unnamed Chinese government officials,  pleading with the Obama Administration to cut spending, deficits and taxes, and so put more money in the pockets of American consumers. They will certainly choose to spend some of this cash on Chinese-made products and so help boost employment, wages and living standards across China.

As panaceas go, this one would be a lot more effective and all-around helpful than anything the American government and its media allies are peddling.