Global Times Forum: China Social Issues to be Policy Drivers

April 29, 2011 Posted by China Briefing Reading Time: 5 minutes

New five year plan examined by industry leaders

Op-Ed Commentary: Chris Devonshire-Ellis

Apr. 29 – The Global Times’ first Leadership Roundtable meeting was held yesterday in Beijing, attracting many senior executives from key MNCs in China. The newspaper, whose English language version and onsite forums have been available for the past 18 months, is an offshoot of China’s People’s Daily, but aimed more at presenting China’s views to the global stage. Consequently, some of its editorial tends to be more far reaching and controversial than many of its rivals available on the mainland. Recent front page news items for example have discussed the Dalai Lama and the Tiananmen Square anniversary. The Leadership Roundtable was designed to bring the newspaper closer to foreign MNCs in China, with a view to establishing better dialogue and gaining insights into the issues that foreign companies face in China. Centered on the new five-year plan, the roundtable provided a platform to discuss the following issues:

The global economic outlook and business opportunities with reference to China
The fundamental economic and social objectives of China’s 12th five year plan, and sectors to be opened to foreign participation
Challenges the new five year plan poses to foreign investors
Maintaining growth amid China’s adoption of new tax policies and the depriving of foreign companies of privileges

Moderator Marinanne Gumaelius, First Counsellor of the European Union, stressed that the WTO mechanism had worked well to prevent the global financial crisis from being as deep as previously seen in similar global events, and that the fact the world had not gone into financial meltdown proved the mechanism was working. However, Dr. Cyrus Ma, an economist with SGS countered that although the WTO had served its role well, its reach was no longer broad enough. Stated that the WTO commitments mainly dealt with the manufacturing industry, he pointed out that the WTO framework does not include the regulation or mechanism to manage global commodities, and that was likely to cause future stresses, especially in China as the manufacturing industry relies largely on commodities. He called therefore for China to recognize the need to instigate the development of a global governance over commodities prices and thus to ensure a smooth and reliable supply over commodity supplies. Without this, he felt, China would face problems as the stabilization of production could not occur without the development of an global institutional framework governing commodities.

Reflecting on comments I made concerning the viability of the new five-year plan as a new generation of leaders is about to inherit a plan not of their making, Dr. Jianzhong Lu of BHP Billiton believed that the government was aware of this and that China benefitted from taking the longer term view. The government would try and ensure the basic aims of such a plan would be carried out. However, this was also factored against additional comments made by Dr. Ma that the new five-year plan lacked any enforcement policies, and without this it was indeed unclear which aspects would be followed through. Businesses wishing to examine the details within would also need to marry up the proposals with known and established Chinese policies, as without these additional elements, it may not prove strong enough to be enforced.

Christina Lee of Walmart said their business felt poised to take advantage of the fact that China possessed 800 cities in the second-third-fourth tier range, and that this would provide plenty of scope for expansion into China. The market, she said, was currently valued at US$1.7 trillion per annum, making it the second largest in the world, and that it was expected to grow at over 10 percent per annum for the next three decades. She noted that the Chinese middle class currently numbered just 42 million, was set to grow to 900 million by 2025, and that the opportunities for retailers to expand within this market were immense.

Carrefour’s Vice President, Eric Deliers, commenting on second and third-tier city expansion, had noted earlier that as an example the retailer now had three branches in Urumqi, and that their business there was “profitable.” He did mention that certain cultural aspects had to be taken into consideration, such as Carrefour not selling pork products in Xinjiang, and the in-store aisles being labeled in Uyghur language in addition to Chinese and English.

However, Frank Wang of Novartis stressed that although China wanted to increase domestic consumption, the real question was whose? China possessed several different income groups, and with 30 percent of China’s rural population expected to move to cities within the next decade, correctly targeting these individuals would be key to reaching out to them. He also noted that China had 27 million students in university, and that this would help alleviate associated difficulties in changing China from being an agricultural and low end manufacturing based economy into a service-based industry. Of this, I may add that with a population of some 400 million (a figure I have heard at other similar events) moving from the countryside to cities, China will face a serious need for vocational training to reeducate what are essentially peasant farmers to support the service industry. At present, a waiter in a coffee shop is referred to as being in the service industry, and this needs to change to truly move China up the added value chain and get people into innovation industries.

Tax reform was discussed, were it was stated by one of the government researchers that foreign employers generally had higher labor costs than domestic firms. This was thought to range from 30 percent of total cost for a domestic company, yet rising to 45 percent or more for a foreign-owned entity. Recognizing that different industries would have different experiences, the EU delegate stated that EU businesses only wanted equality, not preferential treatment, but that the rising costs of labor in China were proving to be a concern. It was felt an adjustment to the labor law would be advisable for the economy overall. In some industries, most notably service, the rise of business overheads in China was outstripping rises in profitability, and this was not a situation that could carry on indefinitely or companies would start to become bankrupt.

A discussion took place on the future nature of reform in China, where it was generally agreed that the area where China needed change would be social reform. This, it was thought, would in fact become a driver for the Chinese economy in its own right. China had recently faced several crises in food, consumer safety and security, and the government had not addressed this properly in the previous two decades. Feeling that Chinese consumers lacked protection, while China’s manufacturers had gained protection was a key theme. Errant manufacturers may get fined, but these were not sufficient to defectively deter poor or even dangerous goods reaching the consumer. Consumers in China were also rarely compensated for damages, and could, if protesting too strongly against a Chinese state-owned manufacturer, even end up in prison. It was felt this represented an imbalance and that this issue would become a major policy driver for the next leadership. It was now time, it was thought, for the Chinese government to change the legislation to better promote consumer rights in order to protect the government against social disorder when problems occurred. It was also suggested that the government out-source the problem to private, commercially-based third party companies, with the government instead taking the role as referee when disputes occurred. The professional aspect of “good practice” needed to be introduced in all sectors. It was felt the ultimate message the 12th five year plan would deliver upon therefore was the consumer rights issue, and that legislation and reform in this sector in particular would prove to be the lasting aspect of reform the government is next set to introduce.

Chris Devonshire-Ellis is the principal and founding partner of Dezan Shira & Associates and the founder and publisher of Asia Briefing. He also sits as Vice Chair of the Regional UNDP business advisory council. He can be contacted at chris@dezshira.com.

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