APRIL 2015

2015

China’s accession to leadership ranks in economic power is leading to different levels of exchange between the United States and China that will better position their understanding and cooperation.

This issue of China Call Report also notes the role the market is playing – and can further play – in fostering innovation in China.

From visa agreements between Presidents Obama and Xi that promote reciprocal tourism and business, to ventures that put U.S.-style health-monitoring kiosks in Chinese locations, to the increase in business fairs, there is a new level of communications that fosters cooperation – especially a s C h i n a n o w s e e s i t s e l f a s a comprehensive marketplace and views the United States as a widening market for investment.

Anita Tang, Managing Director

Zhang Weiying, an influential Chinese economist, delivered the Sixth Annual Scholl Foundation Lecture to an audience of some 200 at the January 27 event sponsored by The Chicago Council on Global Affairs at the Chicago Club – and his subject was the hurdles China faces to transition to a new growth model.

He said these hurdles included the fact that there was too big a state sector in China’s economy: that it was over-regulated, particularly in financial areas; there was weak protection in property rights; that it was not yet a rule-of-law economy, and that among other hurdles, there was pervasive corruption.

N e e d e d r e f o r m s , h e s a i d , included reducing the state sector and setting judicial independence. A challenge was how to combine democracy with meritocracy.

Zhang is the Sinar Mas Chair

Professor of Economics at Peking Universi ty’s National School of Development. He also is the chief economist of the China Entrepreneurs Forum and director of the Center for Market and Network Economy of Peking University. Widely published, he is the author of a new book, The Logic of the Market: An Insider’s View of Chinese Economic Reform.

He was Dr. Scholl Foundation Vi s i t i n g F e l l o w o n U S - C h i n a Relations, The Chicago Council on Global Affairs. Ms. Pamela Scholl is President of the Foundation.

Pictured above: Ms. Pamela Scholl , Dr. Zhang Weiying, and Dr. Phil Levy, Senior Fellow on the Global Economy, The Chicago Council on Global Affairs.

Zhang’s remarks are reported on Page 2.

Photograph by Ana Miyares

China's New StatusFosters Exchange

Renowned Economist, The Scholl Lecturer, Describes Hurdles China Faces For Growth

Zhang WeiyingAddresses Council

Economist Portrays"Markets Over Mao"

A summary of Zhang Weiying’s address by Richard Longworth, a Distinguished Fellow of the Chicago Council on Global Affairs, is the basis for this report.

Zhang i s an ou t l i e r among Chinese economists and an outspoken champion of the free market and of ent repreneur ia l i sm. He sa id that China’s economic growth in the future depends on free market reforms, including a shrunken state-owned sector, deregulation, and the rule of law.

Zhang indicated that the three-decade model of Chinese economic growth based on state guidance and led by exports has gone about as far as it will go. Annual growth, still above seven percent, is at the lowest level in 25 years.

There are several reasons, he said. China had “the latecomer’s advantage” in the global economy and it had a cheap labor supply – both diminishing strengths now. In addition, global markets have a “limited potential” and severe e n v i r o n m e n t a l p r o b l e m s a r e imposing costs on China’s economy.

In addi t ion, labor costs are doubling every five years, he said, partly because the nation’s one-child policy means that the labor force is actually beginning to decline.

The solution, Zhang said, can be found in the teachings of Western

Economist Nicholas R. Lardy, who recently addressed the Chicago Council on Global Affairs, has traced the rise of private business in China in his heavily documented new book, Markets Over Mao.

T h e A n t h o n y M . S o l o m o n Senior Fellow, Peterson Institute for International Economics, in his detailed analysis of China’s rapid growth since 1978, concludes it is primarily because of the freeing of the private sector and the shrinking of the state’s role.

Market forces came to play an even larger role in resource allocation, and private firms emerged as the most dynamic element in China’s economy. These firms were virtually the sole source of job creation and a big contributor to China’s growing role as a global trader.

Looking ahead, Lardy observes that Chinese leadership, by freeing service firms from state domination, can contr ibute substant ia l ly to economic growth. He argues that the current leadership is likely to rely more on market forces to meet the increasing demand for cleaner air and water and safer food supplies, providing a stronger social safety net, and making economic growth more inclusive.

Markets Over Mao is available through the Peterson Institute for International Economics, Washington, D.C., www.piie.com.

economists such as Adam Smith and Joseph Schumpeter but not, he stressed, John Maynard Keynes.

The secret to a growing economy, he said, is wealth creation, which depends on innovation, which depends on entrepreneurialism. Government stimulus and, especially, a government industrial policy, is not part of this equation, he said.

China has been put t ing too many of its eggs in the export basket, Zhang said. As a result, its domestic market is essentially “unexplored,” even though many of its individual provinces, led by Guangdong, are bigger than Taiwan all by themselves.

The truth is that “everything in China is a big market,” Zhang said, from telecom to luxury goods to foot massages.

More than half of all Chinese live in cities, and these cities are linked by new highways, communications, and high-speed rail.

But China won’t be able to take full advantage of the market unless there are major reforms, Zhang said. One is a reduction in the state’s share of the economy from the current 35 percent to about 10 percent. Another is the protection of property rights, to give entrepreneurs the security to risk and invest.

T h e e c o n o m y t o d a y i s t o o regulated, particularly in the finance section. Individual entrepreneurs should have the right to set up private financial institutions, he said.

Corruption, like environmental degradation, is a drag on the economy and must be reformed, Zhang said. Land must be privatized, and the gap between urban China and rural China narrowed.

Last on the list of reforms was democracy, which Zhang admitted that, in China, “is a long-term project, not for the moment.”

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China's CitiesTo Hold Billion

China's Growing Elder PopulationAttracts New Services And Products

China’s cities, by 2030, will be home to some one billion people – three times the current population of the United States – following plans laid out by Beijing in March, 2014.

The government hopes to raise urbanization about a percentage point a year, from 52.5% to 60% over seven years.

The plan will give rural residents l iving in cit ies urban residency permits, granting them the same benefits and rights urban dwellers have.

The last phase of urbanization brought 500 million people from country to c i ty, while focusing on providing roads, railways, and airports.

Planning authorities, according to the China Business Review, now intend to build more extensive urban public transport systems, a national rail and road network to connect smaller cities and townships, increase water and waste treatment ratios, expand broadband internet coverage, increase the use of cleaner-burning natural gas, among other focuses on people’s well-being.

“A ‘people-centric’ urbanization in China also means theoretically greater spending on social welfare, hopefully to boost consumption of services.”

China’s population of the over-60 is likely to exceed 400 million in the next 30 years – and it already is attracting wide attention among businesses and industries gearing up to provide for the elders’ needs in health, safety, personal comfort, and lifestyle preferences.

The Wall Street Journal and the Hong Kong Trade Development Counc i l have r epor t ed on th i s situation, and are sources for this article.

According to United Nations da ta , by 2050 Ch ina’s ove r-65 population will account for a quarter of its total population and may exceed the entire U.S. population.

T h e J o u r n a l n o t e s t h a t “Researchers at Abbott Laboratories in Shanghai are busy testing flavors of nutritional drinks for China’s senior citizens. Kimberly-Clark Corp. has launched television ads for its Depend adult diapers and expanded distribution online. Local e-commerce companies l ike Al ibaba Group Holdings Ltd. and JD.com Inc. are rolling out senior-focused marketing pushes.”

Although there are segments of elders who are fit, relatively affluent, and eager to engage in travel and other recreational activities, much of the population is hardly well-off. The average monthly pension for an urban resident in 2014 was a little over 2,000 yuan, or about $320, less than

half the wage of an urban worker. But the sheer numbers make Chinese seniors a big market.

Sales of goods and services for the elderly could reach 106 trillion yuan ($16.96 trillion) by 2050, up from four trillion yuan ($64 billion) i n 2014, acco rd ing to a r epor t from the China National Working Commission.

Corporat ions are explor ing means from stores to internet to develop this market. Abbott has set up distribution in more than 11,000 retail outlets in pharmacies across China; Nestle SA began building free health-check stations in retail outlets like Wal-Mart so seniors can monitor blood pressure and cardiovascular health. Chinese electronics company Hisense Co. launched a smartphone for seniors featuring easy-to-access flashlight and medical-help options. Alibaba, with two million online shoppers over the age of 50, has launched a senior shopping section on its Taobao marketplace.

With res t r ic t ions eas ing on private-sector investment in elder care, among other areas, developers are scurrying to build nursing homes.

In mos t wes te rn count r ies , elderly care facilities are residential family care homes, freestanding assisted living facilities, nursing h o m e s , a n d c o n t i n u i n g c a r e retirement communities. Among western countries, the United States is a market that is very experienced in elderly care services. According to the United States Department of Health and Human Services, the older population (persons ≥ 65) numbered 39.6 million in 2009, and by 2030, there will be about 72.1 million.

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Chinese Using MoreU.S. B1 And B2 Visas

Kellogg HoldsChina Conference

Hong Kong HoldsJune Business Fair

The number of Chinese citizens receiving the new extended United States B1 business and B2 tourist visas increased in December, 2014 and January, 2015, according to China Daily.

The U.S. issued 351,650 of the visas to Chinese citizens, following the November agreement by U.S. President Barak Obama and Chinese President Xi Jinping to reciprocally extend tourist and business visas to 10 years from one year and student visas to five years from one year.

Nearly 30 percent of all foreign students and exchange visitors in the U.S. originate from China, noted China Daily. “Chinese visitors have accounted for one-fifth of the growth in overseas travel to the U.S. since 2008.”

The paper quoted a White House

The Kel logg Greater China Business Conference 2015 will be held at the Jacobs Center in Evanston, Illinois, May 9.

“China's Next Chapter: Future Growth Engine" features professional and academic experts. There will be two keynote presentations, and panel discussions covering Technology and Innovation, Retail and Consumer Market, and Sustainability.

To register: http://www.kellogg.no r thwes t e rn . edu / con fe r ence /chinesebusiness/register.html.

Hong Kong business leaders are coming to Chicago to share with U.S. companies their insights on how to benefit from Asia’s growth, with particular focus on China.

On June 10, 2015, at McCormick Place, a 100-strong delegation will explore opportunities with potential partners in the U.S.

For information for the event: www.thinkasiathinkhk.com/2015.

statement, “China is the fastest-growing out-bound tourism market in the world. A competitive visa policy

will help us to meet projections that as many as 7.3 million Chinese travelers will come to the U.S. by 2021, contributing nearly $85 billion a year to the U.S. economy and supporting up to 440,000 U.S. jobs.

In 2013, 1.8 million Chinese tourists visited the U.S., contributing US$ 21.1 billion to the U.S. economy and supporting more than 109,000 U.S. jobs, the paper reported.