Here’s a thought for Valentine’s Day:
Wei Shangjin, a professor at Columbia Business School, proposes an intriguing new theory in Forbes to account for why the Chinese save so much. Conventional explanations of China’s high savings rate focus on high out-of-pocket expenses for health care and education, the absence of a social safety net, and an undervalued currency that makes exports cheap and imports expensive. But in Wei’s view, it all boils down to sex — the gender ratio, that is, and the competition it causes in the marriage market.
In China today, he notes, there are 122 baby boys born for every 100 girls. Given China’s one-child policy, most Chinese parents, especially in low-income rural areas, have a strong preference for having a boy to carry on the family line (in my own observation, residents of high-income cities like Beijing, in contrast, seem to actually prefer girls). Even though it’s technically illegal under Chinese law to tell an expecting couple the sex of a fetus (for precisely this reason), many find out anyway and will abort a girl in order to try again for a boy. The result is a lopsided demographic with a lot more boys than girls.
China’s one-child policy was instituted in 1979, so that means there’s been plenty of time for those baby boys and girls to grow up and start looking for mates. And when they pair off, there aren’t enough girls to go around. According to the numbers, one out of every five young men will be unable to find a partner. Which means, if you don’t want to end up the lonely heart, you better have a plan to impress the ladies. For families with boys, Wei believes, that means saving up to buy housing and other accoutrements of wealth that will help attract a mate (in fact, in some parts of China, bachelors and their parents have resorted to forking over a cash “bride price” that can go as high as US$5,000, a payment that represents several years’ income for a farming family. The lucrative practice has given rise to organized scams involving “runaway brides” who take the money and disappear. For a rather eye-opening read on this topic, check out this recent Wall Street Journal article).
Wei’s theory, that mating competition drives high savings rates in China, is an interesting notion, one he tries to back up with hard data. He reports:
In our study we compared savings data across regions and in households with sons versus those with daughters. We found that not only did households with sons save more than households with daughters on average but also that households with sons tend to raise their savings rate if they happen to live in a region with a more skewed sex ratio.
Even those not competing in the marriage market must compete to buy housing and make other significant purchases, pushing up the savings rate for all households.
The effect is significant. The household savings rate in China rose from about 16% of disposable income in 1990 to over 30% today, which is much higher than most countries. (The comparable rate in the U.S. was about 3% before the crisis, and 6% in recent months.) About half of the increase in the savings rate of the last 25 years can be attributed to the rise in the sex ratio imbalance.
When I read Wei’s article, it immediately called to mind a joke one of my Chinese students told me. My wife and I had just had our first child — a boy — this past October, and he was quick to congratulate me on this, for most Chinese, highly enviable outcome. I remarked, though, that my wife’s parents would actually have preferred a girl. He said that this was a common attitude in Beijing, unlike the rest of the country. A boy, he said, is like China Construction Bank. You must save and save in order to afford and buy a house. A girl, on the other hand, is like CITIC (China’s first financial institution set up to raise foreign investment) because she will bring in money from outside. It’s a very Chinese analogy — I didn’t quite get it at first — but it captures an outlook that would seem to back up Wei’s theory.
Demographics certainly have a big impact on saving and spending patterns, but the usual focus is on age, not sex. I don’t know whether Wei’s theory is correct — I still think saving to pay for out-of-pocket health care is a key factor — but it certainly presents food for thought. If it is true, even in part, it suggests that the Chinese preference to save rather than spend may go far deeper, and prove far less tractable, than many economists believe.
(In any event, the balance has certainly shifted since 1973, when Mao allegedly made Kissinger a bizarre offer to send 10 million “excess” Chinese women to the United States. Don’t take my word for it, check out the BBC and AFP).
On Thursday and Friday last week, I appeared on back-to-back episodes of CCTV-9’s “Dialogue” centered on the U.S. political scene.
Thursday, January 28: "Obama's Shock Therapy Against Wall Street"
The first show focused on President Obama’s recently announced proposals to reform the U.S. banking system, in the wake of the global financial crisis. I made some points that I know are out-of-sync with popular feeling these days, but I believe are essential if we’re going to get this right. I’m not opposed to reform — in fact, I believe that reforms that address the real causes of the financial meltdown are essential. But I think that Obama’s Paul Volcker-inspired proposal to revive Glass-Steagall (in spirit if not in every detail) will move us in precisely the wrong direction, and only further concentrate risk and diminish transparency in the system, without doing anything to properly align incentives going forward. (As I mentioned in the show, I found it telling that the Europeans applauded Obama’s announcement but declared they have no intention of pursuing a similar course.) I’ll be elaborating on these criticisms, and on what I think more meaningful banking reform should look like, in future posts.
The second show focused on the President’s broader State of the Union message and its political context. (As many readers already know, I used to work on Capitol Hill. In fact, I was actually sitting in the House chamber during the 1996 State of the Union when President Clinton declared that “the era of Big Government is over.”)
Anyone who’d like a reasonably quick and easy to digest summary of my take on China’s real estate market might want to check out this two-part (30 minute each) interview that aired this weekend on Blue Ocean Network (BON), a brand new English-language channel focused on China. You can view Part 1 here and Part 2 here.
Some of the topics we tackled include:
- What is a bubble?
- What are the signs that there might be a real estate bubble in China?
- What factors are driving China’s property prices upwards?
- Why are so many apartments, offices, and malls lying empty and idle?
- How are China’s residential and commercial real estate markets different, and why does it matter?
- What impact have China’s stimulus efforts had on property markets?
- How exposed is China’s state-owned banking system to a property bubble?
- What is the government doing to rein in real estate markets, and how effective are these policies likely to be?
- Is China, as some argue, another Dubai waiting to happen?
Sometimes a picture of reality is formed from the accumulation of many small data points, perhaps insignificant in themselves, but together forming a compelling impression. I wanted to share a couple of interesting reference points I’ve come across in relation to China’s real estate market, and the question of whether there’s a bubble in that market.
The first is a fascinating interview I read in this month’s (January) issue of China International Business magazine with Zhang Xin, the CEO of SOHO China. Zhang is one of the best-known women in Chinese business, and her company is one of the country’s leading property developers, listed on the Hong Kong stock exchange (SEHK: 410). She is unambiguous in her belief that her industry is in the midst of a bubble:
We don’t really have a view on when it will end; [but] we do have a view that this is a bubble. Real estate is very much driven by government policy. This year we have RMB 4 trillion through the stimulus package, another RMB 6 trillion from municipal bonds, another RMB 10 trillion from bank loans. We have RMB 20 trillion in the system and it all finds its way to real estate. If the government next year decides to continue the relaxed monetary policy the market will continue like this, regardless of whether this is wasteful investment or not — people will still buy and we will still be building and selling.
These buildings are not fully occupied and people should be worried about it. I am sure the government is worried about it, but what do you do, they want the stimulus and if you want to create jobs then this is a by-product.
[Not to detract from her point, but I should note that I tally the total influx of funds somewhat differently. I think she is double-counting the RMB 4 trillion government stimulus, which was funded half by bank lending and half by municipal bonds. The combined figure, as I calculate it, is more like RMB 16 trillion, or US$2.4 trillion.]
In particular, Zhang points to the role of State-Owned Enterprises (SOEs) — flush with cash from stimulus lending, many of them with no prior experience in the real estate sector — in bidding up prices:
SOEs can be irrational. CEOs of SOEs have short tenures and often they are not quite matching with their responsibilities so their decisions can be short term focused. If you know that your tenure is only three years you want to maximize your achievements, so whether you buy this land at the highest price doesn’t matter because [it is] only finished down the road — and you are no longer there. That is why we are worried.
Today [December 3] there was an auction, look at this price, it’s crazy. It was down to two SOEs competing. [Nowadays] if we want to bid on residential land it is unlikely we will get it. It is so expensive and all the SOEs are bidding the prices up to the sky.
What I found even more striking that her observations on what she sees happening is how it is affecting her business strategy:
Basically . . . our strategy is to sell everything we have. The real estate business should really be looking at rental yield; build a building and then lease it out with the rent giving a decent return. But, because of where China is with asset bubbles, people want to buy the assets regardless of whether they can be leased out or not. People just want to hold [property], even if it is empty.
. . . Now, if you look at the prices for the property being sold versus the rent you collect there is a real disconnect. Prices are too high, rent is too low, so if you hold property in order to get yield you are likely to get very little. For us it makes no sense to hold property, so our strategy is to sell everything. We see ourselves very much as a manufacturer. We buy land, we build, and then we sell. And the asset bubble has compelled us to be even more of a manufacturer . . . the strategy is to keep a lot of cash, to sell as fast as possible, and to turn around assets faster — even faster than before.
That’s a rather remarkable statement coming from one of China’s most prominent and successful real estate developers. You can read the entire interview here.
The second reference point comes from Colliers International’s latest (3Q09) reports on the Beijing residential, office, and retail property markets. They show slumping rents in all three markets throughout 2009, a trend that, as Zhang Xin observed, is awfully tough to square with booming sale prices.
Figure 1: Rents of Beijing Luxury Residential Market by Sector
Figure 2: Rents of Beijing Office Market by Sector
Figure 3: Ground Floor Rents of Beijing Mid- to High-End Shopping Centers and Q-on-Q Growth
The third reference point comes courtesy of Aileen Chang, a regular reader of this blog. She’s posted an excellent six-part series on her own blog that offers some valuable insights into the Chinese property market, and I highly recommend checking it out. One of her central insights, which I absolutely agree with, is that both the supply of and demand for housing in China is highly segmented, and that there’s a severe mismatch between the kind of housing most people are demanding (for actual living purposes) and what is being provided (for investment purposes). She concludes that:
. . . increasingly more people cannot afford to live in the newly developed properties but some people has enough money to buy increasingly more new property. This is clearly not what a sustainable or healthy property market look like. [sic]
Aileen also offers some revealing comparisons between the Chinese and South Korean property markets, and presents a nice summary of her key conclusions here.
The fourth and last reference point is purely anecdotal, but interesting nonetheless. As I’ve mentioned before, I recently got a driver’s license and bought a car here in China, and have been driving it around Beijing. One of the things I’ve noticed is the number of touts passing out real estate flyers to motorists stopped at busy intersections throughout the city. The flyers aren’t for typical living quarters either — it’s all ultra-fancy top-end luxury developments they’re pitching. Apparently they figure anyone driving a car probably has cash they’re just dying to invest in real estate. It’s as though, at the peak of the dot-com bubble, you could buy shares in Yahoo! or Amazon.com from squeegee guys on the street. It certainly doesn’t prove anything about the state of the market, but definitely gives you a feel for the frothy mood out there.
On Thursday morning, I was on China Radio International talking about the Iranian nuclear program and whether the US and its allies will resort to military action in the foreseeable future to prevent Iran from developing an atomic bomb. I was honored to appear along with Hua Liming, the former Chinese ambassador to Iran, who was there during the 1979 revolution and the ensuing hostage crisis. You can listen to the program or download it here (click on the first hour).
During the course of the discussion, I noted that — assuming Iran is working to develop nuclear weapons — the United States has four basic options, each of which is problematic in its own way:
- Military Action. The most direct way to “stop” Iran’s nuclear program would be to launch airstrikes on its nuclear facilities. But as US Defense Secretary Robert Gates has noted, there is no guarantee such strikes would be effective and they would probably just “buy time,” delaying Iran’s development efforts but not stopping them (nobody is seriously talking about invading and occupying Iran, and there’s no evidence that the massive preparations that would require are underway). If the U.S. did attack, Iran has a potentially effective ways to retaliate. First, it could try to close the narrow Straits of Hormuz, the main route for exporting oil and natural gas from the Persian Gulf. It’s not certain that Iran’s armed forces could succeed, and in the medium-term such a step would severely damage Iran, by cutting off its own supply route for importing gasoline. But even an unsuccessful attempt could send shock waves through an already fragile global economy. Second, Iran could fairly easily stir up instability in neighboring Iraq and Afghanistan, putting U.S. forces and interests at risk. And third, Iran could use Hezbollah to launch terrorist attacks on American targets around the globe, including in the U.S. itself. For all these reasons, U.S. military planners are reluctant to contemplate an attack on Iran.
- Economic sanctions. One alternative to military action would be for the U.S. to persuade its European allies, and the rest of the U.N. Security Council, to impose economic sanctions on Iran. The U.N. already has approved several rounds of mild sanctions, and the U.S. has had a great deal of success in using diplomatic pressure to isolate Iran’s banking system. But to apply the kind of tough sanctions that might actually change Iran’s mind — choking off business to companies owned by Iran’s Revolutionary Guard, for instance, or cutting off gasoline imports — would require sign-on from Russia and China, and the chance of getting that approval look slim. With each “deadline” that slips by without any agreement on taking action, the sanctions threat loses more and more credibility.
- Acceptance. If the U.S. doesn’t like its military options, and finds itself stymied on the diplomatic front, it may have little choice but to accept a nuclear Iran — for the moment at least — and try to adjust to that reality (focusing, for instance, on developing regional anti-missile systems with its allies). That is essentially what the U.S. has done in relation to North Korea. The concern, however, is that Iran’s development of a nuclear bomb could set up a nuclear arms race in the region, with Saudi Arabia and other Arab states developing their own bombs as a counterweight to Iran. Such a free-for-all could seriously threaten regional stability and increase the chance of nuclear weapons falling into the hands of terrorists.
- Grand Bargain. Alternatively, the U.S. could move in bold new direction and try to strike a broad-ranging deal with deal with Iran that set aside ideological differences and included diplomatic recognition and possibly a presidential visit. The model for this, of course, would be Nixon’s trip to China in the early 1970s. Many feel that ideological differences (over human rights, for instance) cannot and should not be set aside, but assuming they were, this route would still present two main difficulties. The first is the deep mistrust between the two sides — striking a deal would involve considerable political risks on both sides. The second would be the reaction of existing U.S. allies in the region — not just Israel, but also Saudi Arabia and the UAE — who would find their interests threatened (we tend to forget how negative the initial response of US allies in Asia was to Nixon’s China trip).
Despite what some critics have claimed in recent years, the United States is not “bent on” war with Iran. To the contrary, just as in North Korea, it finds itself on the horns of a very tricky and unwelcome dilemma.
If you’re looking for the lighter side of economics (is there one?), hip-hop over to YouTube and check out the hilarious rap video faceoff pitting John Maynard Keynes versus Friedrich Hayek over what causes booms and busts — and what to do about it. Director John Papola, who used to work at MTV, and Russ Roberts, an economics professor at George Mason University, have done a fantastic job conveying complex but incredibly relevant ideas in an entertaining way. It really is must-see. For anyone who has trouble following the lyrics, you can find them at the original site here.
Besides the sheer creativity of the effort, what I found really astonishing was how well Hayek’s “rap” captured the essence of my arguments (familiar to readers of this blog) concerning China’s stimulus projects, bank lending boom, apparent GDP growth, real estate bubble, and rising inflation:
The place you should study isn’t the bust
It’s the boom that should make you feel leery, that’s the thrust
Of my theory, the capital structure is key.
Malinvestments wreck the economy
The boom gets started with an expansion of credit
The Fed sets rates low, are you starting to get it?
That new money is confused for real loanable funds
But it’s just inflation that’s driving the ones
Who invest in new projects like housing construction
The boom plants the seeds for its future destruction
The savings aren’t real, consumption’s up too
And the grasping for resources reveals there’s too few
So the boom turns to bust as the interest rates rise
With the costs of production, price signals were lies
The boom was a binge that’s a matter of fact
Now its devalued capital that makes up the slack.
Whether it’s the late twenties or two thousand and five
Booming bad investments, seems like they’d thrive
You must save to invest, don’t use the printing press
Or a bust will surely follow, an economy depressed
Your so-called “stimulus” will make things even worse
It’s just more of the same, more incentives perversed
And that credit crunch ain’t a liquidity trap
Just a broke banking system, I’m done, that’s a wrap.
While I have a lot of respect for Keynes as a thinker, the message of Hayek and the Austrian School — that ultimately, real wealth creation is what matters — has always resonated with me. But to give Keynes his due, I have to note that he was one of the few economists in history who made a fortune from market speculation. He had a shrewd grasp on what drives markets in the very short term.
The following article, which features several of my comments, appeared yesterday as the lead business story in the South China Morning Post. You can access the original version here (registration for free trial subscription required). The picture of the idle steel mill that accompanied the article, which I’ve posted here, was actually a photo I took during a recent visit to Yingkou. The other photo I’ve added here shows the planning model for Yingkou’s development zone.
The reporter contacted me because I’ve talked on this point before, on Al Jazeera and elsewhere. I was happy to share my impressions of what I’ve seen, as well as my concerns, but it’s not my desire to beat up China too badly on this point. I realize that China’s leaders — like many other leaders around the world — did what they felt they had to do in responding to a crisis of unknown dimensions. They had to improvise, and looking back now with 20/20 hindsight, would probably have done some things differently. The U.S. stimulus package cobbled together by Congress contained at least as much waste and inefficiency as its Chinese counterpart. The danger in China, however, is that the stimulus produced such outstanding results — at least in terms of outward measures like GDP — that it’s tempting to mistake the band-aid for a cure.
I thought that, overall, the article did a very good job of presenting a balanced view. As some of the other people quoted point out, there are parts of China that desperately need infrastructure investment. China’s Northeast, where Yingkou is located, has great potential. The question is, when does too much of a good thing, too quickly, become a problem? I’m heartened by the comments by the mayor of Ordos, which suggest that some local officials are recognizing this issue and trying to come to grips with it.
Ghost towns grow with urban development
By Toh Han Shih
South China Morning Post, January 25, 2010
China’s economic stimulus programme has accelerated the already aggressive pace of urban development in the country. But while investment in construction is creating much-needed infrastructure in some cities, it is also adding to the number of ghost towns with nearly empty facilities in other parts of the mainland.
The nation already has its share of empty edifices. Overlooking Beijing’s “Water Cube” swimming centre and “Bird’s Nest” stadium stands Pangu Plaza, a huge but little-used five-tower complex spanning the length of seven football fields. The project includes an office block, serviced-apartment buildings, a shopping centre and the Pangu 7 Star Hotel.
Although Pangu Plaza was completed two years ago, the shopping centre is mostly empty, with virtually no tenants and many outlets boarded up, Patrick Chovanec, a professor at the School of Economics and Management at Tsinghua University, said. “There are no lights in the offices. At night, people don’t seem to be home.”
A public relations executive at the Pangu hotel said the shopping centre and office building are still seeking tenants, adding: “Our hotel’s occupancy rate is alright, but this is the low season, so the occupancy is low at the moment.”
The China edition of GQ magazine threw a lavish launch party at Pangu Plaza in November last year, but a New Zealander who attended said the complex is mostly empty.
“The hallways on the ground floor are empty and you feel that it is a ghost town apart from the top floor where we were. It certainly was not full of activity beyond the show,” he said.
Examples of mega projects abound.
Chovanec describes his visit to a development zone in Yingkou, a port city in Liaoning province, where an industrial zone and a residential zone with a marina are planned.
“The scale of this thing will take your breath away. It is comparable in scale to Pudong (Shanghai’s business district),” he said.
Yingkou’s development zone is under development and hence is mostly empty space.
A government building and a steel mill are possibly the only two buildings in the zone, Chovanec said. “The administrative building is this monstrous monolith. It’s almost empty except for a presentation.”
The steel mill was completed one year ago, added Chovanec. “It’s sitting there empty and they haven’t fired up the furnace. There is so much overcapacity in steel, they can’t sell what they make.”
Over in Guangdong, many residential units sit empty, said Neeraj Sawhney, a Hong Kong textile trader who often travels to the province.
“I have seen houses and shops built in second and third-tier cities in Guangdong in 2005 that are still empty,” he said. “Supply is much more than demand in these cities. Funding was easily available for developers, who went ahead and constructed, disregarding demand.”
China’s fixed-asset investment increased at a faster rate after Beijing launched its four trillion yuan (HK$4.5 trillion) stimulus package in late 2008 to combat the global economic crisis. Investment rose 30.1 per cent to 22.5 trillion yuan last year, 4.6 percentage points higher than in 2008, the National Bureau of Statistics said. Gross domestic product grew 8.7 per cent last year, thanks to the stimulus.
To support the stimulus, banks lent out a record 9.59 trillion yuan last year, of which a quarter went to infrastructure construction, the People’s Bank of China said.
And that investment in physical infrastructure boosts GDP.
“If you spend money, you’ll make 8 per cent GDP growth,” Chovanec said. “Whether it’s productive is another question. The central government said to the provinces, give us your wish list. The local governments accelerated their projects.
“You got 10 to 20 years of infrastructure developments accelerated to a three-year time frame. Once you accelerate it like that, the vetting process gets thrown out the window.”
Although it is difficult to judge any single project as unviable, given that so many massive projects are being rolled out, the probability of waste increases, Chovanec said.
“All over the country, every province has at least one mega project. It’s one thing to build one mega project over a 10-year plan. It’s another thing to build this 10-year project in two years and do many of them all over the country. How much capacity expansion can the economy digest at one time?”
In Yingchuan, the capital of Ningxia province, 70 per cent of GDP growth last year was related to fixed-asset investment, according to the city’s officials.
“I can’t think of any economy where that rate of growth is sustainable,” Bruce Richardson, an American businessman living in Yingchuan, said.
Both useful infrastructure and empty buildings can be seen in Yingchuan, he said. “I see significant investment in transport infrastructure like roads and airports. As soon as a road is finished, it’s used. There are no bridges to nowhere.”
On the other hand, high-end residential units in Yingchuan have a 50 per cent vacancy rate. The local government is considering discouraging the purchase of second or third residential units to slow construction, Richardson said.
Some local officials have realised the massive build-up is generating undesirable effects and are switching towards sustainable growth, including Yun Guangzhong, the mayor of Ordos, a city in Inner Mongolia.
Ordos, with a population of 1.55 million, has been described as a “ghost city” in blogs and Al-Jazeera television, because it contains a newly built city centre with ultra-modern buildings that is nearly empty. Ordos’ population density is 17.8 people per square kilometre, compared with an urban density of 10,606 people for New York City.
In a speech on January 12, Yun said the speed of development “cannot substitute quality and efficiency. GDP alone cannot represent the people’s aspirations or the raising of their income. Fixed-asset investment does not mean industrialisation and urbanisation have improved.”
In contrast to focusing on building infrastructure last year, Yun recommended alternate policies like attracting competitive industries to Ordos and increasing jobs this year.
Yun admitted failings in the administration of projects, saying: “We must not undertake prestige projects for the sake of image and must not fake data.” The city government “contains elements of laziness, falsification, laxness and shallowness in work ethic, which has seriously damaged its efficiency and image”.
Jonathan Woetzel, a director in the Shanghai office of international consultancy McKinsey, said: “There is a lot of living dead out there.”
Most cities have newly developed zones that are often initially empty when completed, he said. “Some work out well, some not.”
As a rule of thumb, if a new city centre has a population of one million in 15 years, that would be successful, and these projects have long-term payback timetables measured in 10 to 20 years, Woetzel said.
In contrast to isolated Ordos, the bustling coastal cities of Quanzhou and Jinjiang in Fujian province are benefiting from the construction of badly needed infrastructure.
The two cities are merging as part of the government’s policy to create mega cities, Douglas Sheridan, a United States footwear trader who does business in Jinjiang, said.
The result is a series of infrastructure projects such as highways, sewage systems and buildings in Quanzhou and Jinjiang, Sheridan said. “They are merging cities, but they don’t have enough fundamental infrastructure like transport and food supply logistics. Buses are not enough. There are more trucks on the roads, so traffic flow is increasing enormously.”
Woetzel said: “On a national level, China has another 15 to 20 years of rapid urbanisation, so on average, urban construction is a necessary development.”
The controversy sparked by Google’s threat to pull out of China is really heating up. Here are two interviews that give my perspective on this issue. For those who are interested in the topic, I highly recommend listening to both because they cover very different ground.
The first is a podcast presented by the American Chamber of Commerce in China. It focuses on the key issues from a global business perspective, emphasizing the impact on China’s business climate and economic ambitions. You can check it out here.
The second is a radio show I did this morning on China Radio International. You can listen in or download it here. The program gives a good idea of the assertive new line China is taking in the Google dispute, and how the government is hoping to define the issue in the minds of Chinese people.
The original argument that got a lot of play in the Chinese media was that Google’s threatened departure was merely an excuse to pull out of a market where it has been doing badly. I was somewhat surprised that hardly anyone tried to make that case this morning — it was hinted at, but perhaps because most well-informed observers find it unconvincing, no one pressed the point.
Instead, especially following Hillary Clinton’s high-profile speech this past week, the focus has shifted towards portraying Google as a tool of the U.S. government, which is trying to bully China. The argument, essentially, is as follows: (1) all countries, including the U.S., restrict the Internet, (2) China’s restrictions reflect China’s values and protect its national integrity, (3) the U.S. is a big hypocrite and using the concept of Internet freedom to humiliate and undermine China.
Never mind that banning child pornography is not quite the same thing as banning political debate, or that spying on violent terror cells is not quite the same as spying on foreign investors. Such leaps of logic are unlikely to persuade many Americans, but they resonate deeply in China. The only thing that gets a young Chinese netizen more riled up than the Great Firewall is any kind of perceived foreign insult to China. They may hate censorship, but they are fiercely (sometimes rabidly) proud of their country and will close ranks behind it if that becomes the issue.
Unfortunately, Hillary’s speech — while well intentioned — played right into that storyline. Of course, the U.S. government had to get involved on some level because the cyberattack on Google raised serious security concerns. But to turn Google’s decision into some kind of morality play — American virtue vs. Chinese oppression — robs it of its real impact, that actions speak louder than words. Google has decided it is no longer worth doing business in China. Many other foreign companies in China shares its concerns. Whether you agree with it or not, Google’s decision will have consequences. It is up to the Chinese to decide what to make of those consequences.
I’m struck by the fact that, among the Chinese guests this morning, there is a stubborn refusal to believe that Google might actually leave China. Surely Google is bluffing, or playing at some game. As I pointed out in my first blog post on this subject, the day Google’s announcement came out, that the bedrock assumption in China has always been that no one could possibly be willing to walk away from the Chinese market. One of the radio guests actually said that today. It’s a classic case of cognitive dissonance: when the evidence contradicts a long-held belief, you stick with the belief over the evidence, and attempt to rationalize.
Now, it’s possible that China and Google will work out their differences — I’m not making any predictions. But most people I’ve talked to — leaders in the business community here and journalists who have covered business in China for a long time – believe that Google will go. And when that happens — if it happens — reality will gradually set in, for Google and for China. “You’ll be sorry!” the Chinese shout after Google. And maybe that’s true. But what if it’s not?
The other day I was on Hong Kong radio (RTHK) talking about a controversy that has flared up in the Chinese film industry, reminiscent of such epic cinematic battles as Godzilla vs. Mothra and Alien vs. Predator. China Film Group, which produces movies and also holds a monopoly on the distribution of foreign films, has decided to yank James Cameron’s Avatar off over 1,600 2D cinema screens across China to make way for its own Chinese-themed bio-pic Confucius, staring Chow Yun-fat (Avatar will continue to be shown on over 800 3D screens). The move, which went into effect yesterday (Jan. 23), unleashed a flurry of angry commentary from China’s “netizens” amid accusations of censorship, protectionism, or both.
I’ve never hesitated to criticize China when warranted, but as I told radio listeners, I’m far from sure there’s a clear-cut case for either charge here.
The reason everyone is paying so much attention to this decision — besides their interest in seeing Avatar — is because of a major ruling handed down by the WTO last year. In response to a petition brought by the U.S., and supported by the EU and Canada, the international trade body ordered China to open up its media markets and, in particular, loosen the exclusive grip that state-owned enterprises like China Film Group hold over movie distribution (notably, the ruling did not strike down China’s authority to restrict films in order to protect “public mores”). China appealed the decision, but just before Christmas the WTO rejected that appeal. However, it did not outline what specific steps China needed to take to implement the ruling, and everyone is watching to see how China handles the issue.
Viewed in this context, it’s hard to see how Avatar is getting a raw deal. The movie was brought to China under the old system, so its treatment is not necessarily a sign of things to come. Even so, for a foreign movie, Avatar enjoyed unprecedented access to Chinese audiences over the popular New Year’s period, which traditionally has been the exclusive preserve of domestic films. According to one report I read, China has approximately 5,300 movie screens nationwide, and Avatar has been showing on over 2,400 — nearly half of them. The film grossed over US$ 80 million, setting a new box office record in China, a market where most movies — foreign and domestic — are readily available for less than $1 on pirated DVD or free download from the Internet. The situation may not be ideal, but compared to the past — the only benchmark that matters as China moves to open its markets — the treatment of Avatar marks a big improvement.
More importantly, from a financial point of view, Avatar will continue to be shown on nearly all of China’s 800+ 3D and IMAX screens. Even though they account for just 1/3 of the screens Avatar has been appearing on, they’ve generated 2/3 of box office revenues, and will continue doing so through the popular Chinese New Year season. The whole attraction of Avatar, after all, is seeing it in 3D — let’s face it, if you’re in China, and you’re really willing to watch it in 2D, you’re probably better off watching a fake DVD or download than trekking out to the cinema.
The charge that has really inflamed online forums, though, has been censorship. Several Chinese bloggers have noted parallels between the movie’s theme — the uprooting of a native people by ruthless developers — and the sensitive issue of forced evictions of peasants and homeowners in China. A columnist with China Daily wrote that “All the forced removal of old neighborhoods in China makes us the only earthlings today who can really feel the pain of the Na’vi.” Seizing on this point, some observers have concluded that the Chinese government pulled Avatar because it was raising uncomfortable social and political issues.
I find this unlikely. First of all, if this were a notion that really terrified the Chinese government, we wouldn’t be reading about it in China Daily, the government’s official English-language newspaper. Second, if officials really were surprised by the reaction (after giving it an all-clear initially) and wanted to ban the movie, why wouldn’t they pull it from theaters completely? The film will still be playing on over 800 screens across the country. If you want to watch Avatar in China as it was meant to be seen — in 3D — nobody’s stopping you.
I’m not saying that the decision to partially yank Avatar was a “purely commercial decision,” as China Film Group executives claim — at least in the legitimate sense they intend. There’s a potential conflict of interest in the company’s dual role — controlling film distribution, on the one hand, and making films, on the other. That same conflict used to exist in the United States, when the big Hollywood studios owned most of the theaters. That’s why in 1948, the U.S. Supreme Court (in United States v. Paramount Pictures) ordered the studios to divest their cinema holdings on antitrust grounds. They’ve been run as separate businesses ever since. As long as this conflict continues to define the Chinese film industry — and as long as the line between state censors and the state-owned film industry remains blurred — people will inevitably wonder at the real motivation behind this kind of ”business” decision. And that’s why the implementation of last year’s WTO decision, which is supposed to grant foreign film makers freer access to Chinese audiences, will be so important to watch.
Readers interested in another well-informed perspective on this story might want to check out this blog entry by Professor Stanley Rosen, the director of the East Asian Studies Center at the University of Southern California.
My comments were featured in two separate reports that aired on CNN today.
The first focused on Google’s threat to leave China, and can be watched here.
The second was a more general piece on China’s rising influence and whether or not it is causing increased frictions with other countries. You can watch the TV report here, and read the accompanying print article here.
