Sunday, March 19, 2006

Notes From China

From March 4-12, I went on an eight day trip to China. It was organized and run by Columbia Business School students – 35 people made the trip. The trip involved a number of company visits, usually two per day, mixed in with visits to the major tourist sites and some time spent walking around the cities.

I had never been to Asia before and I didn’t really have any expectations for the trip, other than from general reading. Below are my notes and observations.

Traveling to China
The flight from New York to Beijing takes roughly 13.5 hours and there is a 13 hour time zone difference (China has only one time zone – kind of odd.) The flight path heads from New York northwest across Canada, up along the coast of Alaska, crosses the Bering strait, and follows the coast of Siberia down to China. New York to Beijing is about 7,000 miles – a little more than a quarter the circumference of the Earth.

On a related note, Federal Express has one of its largest airport/warehouse facilities based in Anchorage, Alaska, rivaling in size that of its Memphis, Tennessee headquarters. Over 400 flights a month come through this facility. Why Alaska? It’s slightly counterintuitive, but Alaska is an excellent spot for a global shipping hub, especially as a way station between the US and Asia. Over 90% of the industrialized world lives within a 10 hour flight. You wouldn’t think it from looking at a map of the world, because a flat map distorts in a way that a globe does not. For instance, Europe is much closer to China than it appears on a map, because you fly over the North Pole.

Fortune magazine had an excellent article in late 2004 on the Fedex Anchorage hub:
Why Fedex is Flying High

Geographically, China is almost the exact same size as the United States. The official population is 1.3 billion, compared to 300 million in the US. I heard a few people on the trip mention that China’s official population estimates are hugely understated, including the representative we met from Goldman Sachs, and that the real figure is closer to 1.6 billion. I did not get the chance to ask why.

In terms of thinking about the country, one can split it into two groups: the rich coastal regions, home to most of the major cities and recent economic growth, and the incredibly poor rural interior.

While slightly outdated (2001), this table demonstrates the disparity. The GDP per capita (in PPP, or purchasing power parity, which means accounting for local prices) of Shanghai was over $16,000, and Beijing was over $10,000, compared to a national average of under $4,000.

A very brief historical review follows. I include events insofar as they are relevant to an understanding of modern China and/or fairly interesting.

China was an imperial dynasty for over 2,000 years, from roughly 221 BC until 1911, i.e. it was ruled by an emperor based in Beijing. China was relatively isolated for most of that period, until European colonial powers (led by Britain) forced China open to trade in the 1840’s and established a presence in the major cities: Hong Kong, Shanghai, etc. This presence lasted roughly a hundred years and left a deep scar on the Chinese psyche.

During the later half of the 19th century, the Chinese imperial dynasty began to rot, weighed down by the pressures of poor leadership, corruption, colonial aggression, and civil wars (including the Taiping Rebellion in the 1850’s, one of the bloodiest civil wars in the history of the world, led by a guy who fashioned himself to be the younger brother of Jesus Christ.)

In 1911, the empire fell and the Nationalist Party came to power. The Nationalists led for a period of three very turbulent decades up through the Second World War. The Japanese occupied large parts of China before and during the war, during which time occurred the still deeply resented “Rape of Nanking” in 1937, wherein the Japanese slaughtered several hundred thousand Chinese.

At end of World War II, the weakened Nationalists, led by Chang Kai-shek remained in power but faced fierce opposition from the Chinese Communist party, which was established in the early 1920’s in China and led by Mao Zedong. The Communists ultimately defeated the Nationalists, and the Nationalists retreated to the island of Taiwan (up to that point a part of China) which they declared the Republic of China (as opposed to the Communist’s “People’s Republic of China” or “PRC” or “Mainland China”)

Mao led China from 1948 until his death in 1976. Mao was, to put it kindly, absolutely nuts. Upon realization that the Chinese economy was falling behind that of the West, Mao launched an economic plan called the Great Leap Forward in 1958, with the idea that the Chinese economy would surpass that of the West within 15 years, mostly through the production of grain and steel. The latter would be smelted individually by people in their backyards.

The end result of this was that over 35 million people died of starvation in the following decade. Mao, at this point realizing that he was in trouble, clamped down severely, launching the Cultural Revolution in 1966 to purge society of any dissenters, “imperialistic intellectuals”, and “capitalist roaders”. This nonsense came to an end in 1976 when Mao died and Deng Xiaopeng, one of his lieutenants, came to power. Deng started a program of gradual economic liberalization that is still playing out to this day.

We spent the first three days of our trip in Beijing.

Beijing lies on a plain in northeastern China, about an hour from the water. Beijing has historically been the center of Chinese empire and is the nation’s capital. The “Forbidden City’ (or Imperial Palace) lies at the heart of the city, sitting directly across from Tianamen Square and the main government buildings. This main downtown area is enclosed by a ring-road, and there are two larger concentric ring-roads which lie outside of that one. Beijing is absolutely enormous, and I found it to be somewhat dull, kind of like Toldeo meets Washington D.C. (A good analogy to the U.S. is Beijing:Washington DC as Shanghai:New York. The largest city in China is actually Chongqing, in the interior, with a population of 32 million).

The amount of construction going on in downtown Beijing is unbelievable. Looking out the window of a skyscraper from downtown, I counted 19 construction cranes – the huge, skyscraper-building kind – and that was only looking out one side of the building. It seemed to me that a lot of the finished buildings were empty and had been so for awhile. The bankers that we met (including a rep. from the Goldman Sachs joint-venture in Beijing) swore that the overbuilding wasn’t a significant problem, but I find that somewhat hard to believe. (On a related note, I had heard before the statement that more commercial real estate was built in 2005 in Shanghai than exists in all of Manhattan. I no longer doubt this is true.)

Part of the build-up is in preparation for the 2008 Beijing Olympics. The Chinese are extremely proud of this event, and you see Olympic ads and posters everywhere.

The pollution in Beijing is unbelievably bad. Imagine the smog in LA multiplied by about 20.

Companies that we visited in Beijing:

Lenovo recently purchased IBM’s PC business. We toured the company’s headquarters, and its accompanying computer factory, which was pretty cool.

UFIDA is an enterprise software company that focuses on small and medium businesses. It had revenues of $125 in 2005, with net margins of roughly 20%. The company is listed in Hong Kong and the market cap is roughly $600m.

Note on Chinese stock market
There are two domestic stock markets, located in Shenzhen and Shanghai. Because of the Communist legacy (under which all companies were owned by the state), there is an old dual-class share system that is currently being reformed. The result of this is that most of the good companies in China have chosen to list either in Hong Kong (which prior to 1997 was “abroad”), New York or London. Thus, when you hear that “the Chinese stock market was down 30% last year”, this isn’t reflective of the larger performance of the Chinese economy as only second and third-tier companies are listed domestically. All of the blue-chips are listed overseas.

Goldman Sachs Gao Hua
This is Goldman Sachs Joint Venture in China. Its structure is interesting and illustrates the complexity of foreign investment and corporate involvement in China.

Foreign companies are only allowed to own up to 33% of Chinese securities firms.
Goldman Sachs owns 33% of Goldman Sachs Gao Hua. Gao Hua Securities owns the remaining 67%.

Gao Hua Securities in turn is 75% owned by Fang Fenglei, a Chinese investment banker, and 25% owned by Legend Holdings, the parent company of Lenovo. Goldman Sachs had a long relationship with Fang prior to the partnership in 2004, and they lent him 100% of the capital for his stake in Gao Hua. Goldman Sachs has an option to buy out the foreign 67% ownership of Gao Hua Securities for a nominal price if and when the 33% ownership restrictions are lifted. Thus, Goldman essentially controls the company as though it owned it entirely. Here are the details.

Morgan Stanley was the first investment bank in China in the 1990s and they went with a more traditional joint venture with CICC, a local Chinese Investment Bank. This turned out to be something of a disaster. The story is well told in a chapter of the book One Billion Customers by James McGregor (discussed below).

We spent the last four days in Shanghai, a city that completely blew me away. In terms of vibrancy, dynamism, and general cool-factor, Shanghai gives New York a run for its money – not in 10 years or 20 years, but right now.

This dynamism comes from a mix of the traditional Chinese architecture, the beautiful colonial Art Deco buildings, the ultra-modern skyscrapers, the futuristic transportation system (elevated highways and the only commercial mag-lev train in the world) and the relative greenness of the city. At night, the entire city is lit up in neon and you feel like you are on the set of Bladerunner. Infusing all of this is the raw capitalist energy of the people. I have often heard commented that the Chinese are inherently some of the most capitalist people on Earth, and I finally understood what that meant when I got to Shanghai.

Looking at history, the rebirth of Shanghai should come as no surprise. In the late 19th and early 20th century, Shanghai was the leading financial center in East Asia. Britain, France, the United States, and Japan each had a “concession” in the city – essentially a part of town owned and run by that government (hence the colonial architecture). The only reason Shanghai ever lost its first-city status was because of the rise of Communist Party in 1949 and the ensuing trade embargos. Hong Kong was the direct beneficiary of these events, and I heard several people mention on the trip that Hong Kong’s best days are now behind it.

One of my favorite movie scenes is the opening to “Indiana Jones and the Temple of Doom” which takes place under the dateline “Shanghai, 1935”. Basically, fast-forward the scene 70 years and that’s what the place feels like today.

Western companies are firmly established in both Beijing and Shanghai. You see KFC, Starbucks, and Mcdonald’s restaurants everywhere, with KFC in the lead in the fast-food race. Likewise, you see Chinese imitators of these brands everywhere you look, which are mostly hilarious.
My favorite was Chinese Colonel Sanders (Or should I say, “Colonel Tseng”?)

Fosun Group
The Fosun Group is an interesting example of a modern Chinese corporation

We met with the 36-year old Vice Chairman (one of the four original founders) and his translator, an alumnus of Notre Dame and the University of Chicago Business School who also served as VP of Investor Relations and as a senior executive in the real estate group.

Fosun was founded as a pharmaceutical company in 1992 by four newly minted graduates of Fudan University, one of the leading universities in China. The founders very smart and ambitious, were also very plugged-in politically, with one of them serving as Deputy to the 10th National People’s Congress and another as a senior official in the National Communist Youth Party.

These guys were obviously very sharp businessmen. The company did well in the pharmaceutical area in the early 1990’s and used the cash flow to expand into steel, real estate, and retail. Currently, it is a multi-billion dollar conglomerate, with several of its subsidiaries listed on overseas exchanges.

The Fosun founders and their peers, in their late 30’s, are the business titans of modern China. I find it interesting that the generation of people aged 40-60, the group who comprise the business leadership in most countries, is not at all active in China as a result of the Cultural Revolution. That generation spent their formative and education years in “re-education camps” and slaving away in the Communist bureaucracy. As a result, there is a tremendous vacuum that the younger generation has eagerly filled.

While there are a number of successful young corporate titans in the United States, they represent a fairly small percentage of corporate leadership. In China, my sense was that this proportion was, and will continue to be, far more skewed towards younger leadership.

Other companies that we visited in Shanghai:
Bank of China, HSBC, Shanghai Media Group

China is a fascinating place. Its transition to a capitalist economy has been extraordinarily rapid and its totalitarian government has greatly helped in that regard (things can move very quickly when there are no dissenting parties, at least none with any power.)

A good friend of mine from college lived in Beijing for a year in 1999. He compared China to the Borg from Star Trek. China is an immensely large and powerful force – it takes awhile to get its act together, but once it does, it moves swiftly and relentlessly. The Chinese government has decided that it wants to make its nation rich and powerful, and all of its decisions are made with that in mind. The political crackdowns take place because the government is obsessed with losing control and stability, which they fear would threaten economic development.

I have little idea how the whole thing will play out politically. My sense is that economic development is occurring so rapidly and people’s lives are getting better so quickly that there is not a huge pent-up sense of rage against the system, at least not enough that would force the system to crumble. It will be interesting to see how the internet censorship issue plays out. My guess is that China will follow the other Asian countries that have gone down the capitalist road before it, like Korea and Japan.

I also think it likely that China will crash hard economically at some point in the next few years. Expansion is happening so quickly and there is so little sound legal and financial infrastructure, let alone any kind of “credit culture” (in the past, when people wanted money – and if they had the right connections – the government gave it to them, regardless of financial return), and the concept of “return on capital” appears to be so completely ignored in many areas, that I don’t see how they can go without hitting a major speedbump or two.

Below are a list of relevant books and articles on China.

One Billion Customers by James McGregor
Published in late 2005 by a former WSJ reporter and president of Dow Jones China who has lived in China for over 15 years, this book contains a series of interesting stories on doing business in China. A quick and worthwhile read. The title is a tribute to an earlier, similar book published in 1937 by another American journalist/businessman, Carl Crow, who lived in Shanghai in the 1920’s and 1930’s:

400 Million Customers by Carl Crow

Operation Yao Ming by Brook Larmer
The story of the rise of Yao Ming, the 7’5” NBA superstar. Yao was very much the product of the totalitarian state – his parents were two of the tallest people in China, intentionally matched and encouraged to have children by the Chinese government.

While I have not read this, a friend who lives in Shanghai recommended it as having the best coverage of recent Chinese political history, far better than One Billion Customers.

River Town by Peter Hessler

Fantastic book. Hessler spent two years in the late 1990’s as a Peace Corps volunteer in Fulin, a central Chinese city on the Yangtze. Hessler is an extraordinarily talented writer, and the book is perceptive, touching, and hilarious. Hessler still lives in Beijing and files a story for the New Yorker magazine every few months.

The Search For Modern China by Jonathan Spence
Spence is a history professor at Yale University. This book is widely considered to be the best one volume history of China.

Inside the New China - Fortune – September 21, 2004
Fortune published this special China edition a year and a half ago, with a dozen pieces on various business and political topics. Excellent coverage of recent Chinese business developments.


Blogger Otaru said...

It's interesting to know what you think of China. Good work!

9:13 AM  
Blogger Prasanth said...


A fascinating view of China, and i mostly agree with your views. I'm an Indian and recently was in Chongquing - i was devastated - thats a mild word!! China is atleast 20 years ahead of India in infrastructure.

It will be great if columbia business school makes a trip to India and would love to read about the difference between China and India - difference between a communist country and a messy democracy!!.



9:11 AM  
Blogger Marie Bouteillon said...


Great background info and descriptions. You captured many of the economic aspects transforming the Chinese landscape. I agree with you that there is a bubble and that it will burst due to weak foundations and speculation.

In addition, I think that social factors will come into play. China is facing two fundamental issues: a widening gap between the rich and the poor and a strong generational disconnect.

As you rightly pointed out in your introduction, the coastal regions produce the highest GDP per capita. Unfortunately, this wealth benefits the rich without improving the lives of the masses. It has become increasingly clear to the people and politicians that even within the coastal regions, economic divides exist.

Politically, China is divided into the ultra capitalist faction and the more socialist faction (ironic, given its communist roots). Both factions (not parties) are very protective of the Chinese economy with respect to the outside world. But their vision of domestic economic and social policies are almost diammetrically opposed.

The economic bubble, when it bursts, will give the socialist faction the lead. They will - no doubt - blame the current leaders for the misfortune of the poor. I'm not sure how strong or good willed they are, but I could see an economic downturn as changing the political landscape (not altering it entirely, but definitely leaving its mark).

In addition to the economic gap, there's a generational gap. Thanks to its understanding of capitalism, mastery of foreign languages and technological advance, the younger generation is soaring to positions of wealth and power while the older generation brainwashed with Maoist ideology is plunging toward poverty.

Not only do they not understand one another ideologically, they also have opposing goals. The older generation wants more taxes to pay for its retirement and health. The younger generation wants freer markets with less secure contracts, lower wages and less unions.

Currently, the needs of the younger generation are met and their voices are heard (to whatever extent possible). On the other hand, members of the older generation are being tuned out.

I hope that the younger generation, with the bubble burst, will see the effects of ultra capitalism and take measures to include some of the demands made by the older generation. Or perhaps an even younger generation will rise to the task.

The more I think about this the more I find to discuss: women's rights, trade agreements, minorities, Taiwan, security issues with N. Korea and Japan...

Due to the economic challenge that it poses and the potential that it offers, China is mainly seen through an economic lens. Yet it is plagued by issues that transgress the boundaries of the Market. At the moment, the market clearly influences and motivates social and political actors to a greater degree than the social and political actors influence the market. Still, this country has to be examined through a series of lenses - that's my only critique. :)

3:42 PM  
Blogger Adrienne said...

I leave for China with an MBA group this week. We attend California Polytechnic in San Luis Obispo, CA. This was a great post and further sparks my excitement. We'll be in Shenzen, Shanghai and Beijing. If you're curious; you can check it out on

1:28 PM  

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