My Trip Back To China

I traveled back to China for two weeks in early November and stayed mostly in Shanghai -- my hometown. I also very briefly visited two beautiful nearby cities, Hang Zhou and WuXi. Since China, particularly Shanghai, is becoming a hot topic recently, I think that it’d be of everybody’s interest to know more about my encounters during my vacation.

The last time I was in China was more than three years ago. Since I had well prepared mentally for the “cultural shock” about which everybody had warned me, I quietly accepted any surprises. Nevertheless, I was very much impressed with the development Shanghai has made during the past three years – not just hardware, but also people’s changing mentality toward their lives. So, everything you’ve heard about China is true; at least from the surface.

Consumerism

Rampant consumerism is a new phenomenon for me. People seem to have much higher income than they should have, for they are constantly looking at great new cell phones, nice cars, and brand-name apparel. There are at least a couple of new high-end malls opened since I had gone back to China three years before. There are obviously more people shopping in these malls. Most foreign brand-name products are 50-100% more expensive than the same products back in the States. That does not matter! For consumers in Shanghai, the more expensive, the better.

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It is particularly interesting for me to see that many people would save money for months or even years to buy a big-ticket item, such as a new cell phone or a car. Most of my friends have upgraded their cell phones several times in the past three years. Most of them who did not have a car three years ago are driving their first cars while complaining about the traffic situation in the city.

For a decent “white collar” job, one can earn about RMB 5,000 – 8,000 ($600-900) per month. Now, consider that a new generation cell phone costs about RMB 2,000 ($240). I doubt that there are many Americans who will spend 1/3 of their monthly income on a cell phone. I brought with me my top-of-line SonyEricsson phone to Shanghai. With a switch of SIM card, I can use my own phone easily. I thought that I could show off my new phone in China to my friends. But this phone has already been marketed in China and people can get it for 2/3 of the price that I paid in the U.S.

Car is another big topic. Almost all of my friends are talking about it. People are fixated on buying a new car or upgrading to a better one. Cars are not cheap in China. Although the price has come down substantially in the past few years due to the tariff cut, the same cars still are 20-30% more expensive in China than they are in the States. In addition, big cities like Shanghai have been trying to limit the license issuances to alleviate the ever-worsening traffic situation. In Shanghai, there are only 3,000 new license plates issued every month. New drivers need to pay about RMB 20,000 ($2,400) to get this license. It does not matter; people who buy cars care less about how much they have to pay for a license plate.

Volkswagon still dominates the passenger car market in China because of its early entry. GM is catching up with its Buick model. There are very few models to choose from compared to what is available in the U.S. An entry-level car such as the VW Passat-class costs about RMB 200,000 ($24,000). GM’s Buick costs RMB 300,000. The high price does very little to inhibit people’s appetite for cars.

I was asked several times what I drove in the States. When told that I was still driving a 10-year old Nissan Altima, they all looked at me incredulously, “but you have so many choices, no?” Then they would probe around to know if I am doing okay here. I painstakingly explained to them that I did not have to buy a new car every 2 years to show that I was doing fine. I could tell that they were suspicious and, without exception, they all offered to pay for my meal after our gathering.

When you consider how much people are making, and how much they are spending on luxury goods, it is very difficult to reconcile the difference. One of the reasons, I think, is that the young generation does not save much. Living with parents, he/she tends to be the only kid in the family. The living expense is relatively moderate even in expensive cities like Shanghai. Most of people I met have high expectations for their income growth going forward. One of my friends wanted me to buy a $100 Burberry scarf in New York for her, because it is twice as expensive in China. She probably makes about $700 a month with a normal office job. She could barely hide her sarcasm towards my “out of date” mentality when I tried to lecture her on savings and planning for the future.

Real Estate

The real estate market is red-hot in Shanghai. Most of the real estate prices have nearly doubled in the past 12 months. This is partly driven by the government policy of encouraging real estate ownership and partly driven by easy credit obtained by developers to build high-end apartments.

Until recently, the government would allow the entire mortgage amount, not just the interest part, to be tax deductible. High-income earners began to buy several apartments instead of paying tax. This policy is scrapped right now for its obvious perverseness.

A middle-level apartment goes for about RMB 5,000 – 8,000 per square meter ($55-$90/square ft). Note that Chinese apartment measurement includes the entire area vs. U.S. measurement of only usable area. For example, 100 sq. meters means about 65-75 sq. meter usable areas depending on configuration. The similar apartment was only 50% of the current price a year ago. A decent 2-bedroom apartment is about 100-150 sq. meter, and it would cost about half million to one million RMB – that’s $60,000 to $120,000. The annual income for a very decent “middle-class” couple, both working, is about RMB 120,000 ($15,000). How can people afford this price? Well, there is an indigenous Chinese way of buying an apartment. Parents tend to chip in for the 10-20% down payment, and would continue to help on the mortgage payments. Parents tend to have an old apartment from the old “planned economy” decade when they “bought” it with great subsidies from the government. Now, they can sell the old apartment and help their child buy a bigger one and then live with them. But in any sense, the current real estate price is limiting many young professionals’ ability to buy their first apartment.

Another by-product of the spiking real estate price is the forming of a new group of real estate speculators. I know many people who would spend every penny of their savings in buying unfinished apartments and sell them to make quick profit even before the apartment is finished. This is a real estate bubble like the one Hong Kong had. People have no fear. Most of the people I met with agreed with me that the real estate price was too high. But they assured me that it would still go up for another two years because the government would support it. They might very well be correct. There is a fundamental belief in a Chinese heart that only real estate can make people super rich – look at all those Hong Kong tycoons! But I strongly suspect that this bubble, if left un-popped soon, would make many people homeless in coming years.

Inflation

After a few years of deflation, increasing prices on most household commodities is very visible in recent months. Prices on rice, cooking oil, clothes, etc. all spiked up by more than 10-20%. For quite a few years, the government has been encouraging farmers to grow whatever they want. The government also wants to decrease farmland acreages to grow more trees. This year is a bad year for rice and cotton. With an emerging market economy and increasing demand, food prices began to go up as the excessive strategic food reserve is drawn down.

In Shanghai, inflation is creeping up in almost every corner except for labor cost. Salaries are still very low due to the almost unlimited supply of excess labor. The service segment almost solely hires people from the nearby province with wages of sub RMB 1,000 a month. Not only the unskilled labor cost is not increasing; the skilled labor market also has surplus supply. Recent college graduates still have a difficult time finding high-paying jobs, even with at least 10% annual growth in Shanghai for the past ten years. The average college graduate can get a job paying about RMB 1,500 – RMB 3,000 ($200-$400) per month. This range has even decreased a little bit in recent years.

It is interesting to observe that with a neck-breaking growth rate every year, China is just begining to see inflationary pressure on the material cost side. With its 200 million excessive labor force, China has no labor cost inflation that we can relate in other modern economies at such growth rates. From what I can see in Shanghai, this can go on for quite a while.

Culture

The cultural changes in Shanghai were evident in every step of my trip. Younger generations – those who were born in the 80’s – are changing the society in a very profound way. Most of those “kids” in urban areas are the only child in the family. Therefore they are constantly the center of attention and they are used to it. The direct result of this phenomenon is the increasing individualism that is very different from my generation (those who were born in the early 70’s). They know what they want, and they value self-determination and social democracy. One of the major differences I find in Shanghai now is the prevalence of the Internet caféspan style='mso-spacerun:yes'> Kids from middle school occupy the entire Internet caféfter school. They play online computer games and do Internet chatting. The cost of going online is quite moderate. A normal seat calls for about 15¢ per hour. A VIP room (which is separated by some curtain) calls for 80¢ an hour.

Pop culture is very much in sync with America’s. I was very much shocked at how many TV channels Shanghai has. Three years ago, I think it was only about 10 or so. Now, it’s more than 30 where I stayed. It may not be that surprising for most Americans who have hundreds of channels to choose from, but remember when I was in elementary school, we only had about 2 or 3 channels. It is even more interesting to see the contents of the TV programs have changed in a very meaningful way. There are more talk shows about everyday life and much fewer politically charged programs. As long as there is no criticism of the communist party, everything else is fair game.

HOW DO PEOPLE MAKE A LIVING IN CHINA?

1.      President of a Multinational Company

David was my high school classmate and is the President of a major multinational company’s China operation. Aside from a few entrepreneurs, he is so far the most successful person among my friends in China. David graduated from college in early 90’s and joined a semi-private securities firm in Shanghai. It was one of the first major securities companies in Shanghai when the stock market was still in its infancy. David, because of his solid English language skill, was the assistant to the founder of that securities firm. Later, David applied for a senior job at an international accounting firm in China. He then was sent to England for training, when he cultivated his business contacts. A few years ago, he was hired as the CFO of a multinational company, and recently was promoted to the President of its China operation.

David represents a very elite group of modern Chinese in Shanghai. He shows his fellow “white collar” staff that they can still be successful without being an entrepreneur looking for legal loopholes in an emerging market. David makes a very good living even by American standards and drives a company BMW. He did not pay much income tax until recently because of the tax policy on real estate purchase that I talked about earlier.

He admitted that in his career path, he was very lucky – with right skills at the right time. As multinational companies are pouring into China, people like David are increasingly popular because they are still “cheaper” than an expatriate leader sent from America or Europe. His company’s China operation is growing several times faster than the rest of the world. With this kind of growth, it only has a handful expatriates in China and most of its senior managers are Chinese.

2.      Middle-level Manager in a Multinational Bank

Mr. Wu was born in late 70’s and was recently promoted to the Assistant Manager position of a local international bank in Shanghai. Before this position, he mainly dealt with personal banking for the bank. Mr. Wu is young and ambitious. His talent in banking-related business is not unnoticed by higher officials. He is due for a 1-year training in Singapore, a usual prelude to another promotion. Mr. Wu, however, has his own plan. He has been accepted by Yale Business School as an MBA student next year, and he is still waiting for a response from Harvard Business School. He has completed the CFA Level II exam and will probably get his CFA designation before going to the business school next year.

We had a long chat mainly on the pros and cons of his decision to come to America to get his MBA. I saw what was bothering him. On one hand, an MBA from Yale or Harvard would greatly enhance his already “golden” marketability in China. On the other hand, he would be losing two significant years of career development that he may not afford to lose at this point. Although Mr. Wu’s investment strategy is at best very short-term oriented, his vision for his career is carefully thought out. He sees the major threat to his “marketability” in the next 10 years coming from an even younger generation with better degrees and designations such as CFA’s. He is afraid that he would not be competitive in 10 years without an MBA from a top American business school. Mr. Wu will get married in a month and will leave his new wife behind to come to America in the fall. I did not offer much advice because my argument centered on how to keep his family together -- but this was the last thing that he considered – he was hoping that I could advise him how much money he could make after business school in America.

Mr. Wu’s dilemma signifies what is bothering China’s emerging young middle-class. There is no shortage of skilled labor. With a few years’ polish in a good job, hardworking and shrewd young professionals can achieve a lot if only they keep an edge over their peers – a lot of peers! Wages for college graduates have been in steady decline and competition in the labor market is fierce. Mr. Wu sighed at the end of our conversation, “It’s not that I’d like to leave my wife behind; but if you stand still here in Shanghai, you will be left behind very soon.”

Another bank official I met is also from this bank in China. Mr. O is Japanese. He married a Chinese wife a few years ago. Mr. O was the one of the leaders among this bank’s 600-strong employees in Japan. But as his wife insisted on moving back to Shanghai with their only son, Mr. O had no choice but to take this job transfer opportunity to Shanghai. But very soon, Mr. O got hooked on Shanghai. With relatively low living cost and a handsome housing subsidy from the company, Mr. O’s life in Shanghai has become more exciting and comfortable than in Japan. Mr. O’s Shanghai operation mainly deals with Japanese companies in China. He maintains that it’s extremely profitable to do business in Shanghai as he can make a 300 basis point spread on 6-month RMB lending compared to less than a 50 basis point profit on Yen or $ lending. This bank is very aggressive expanding in China. Mr. O now hopes to get a more permanent position in Shanghai to capitalize on this growth.

Mrs. O is equally active. Graduated from a top university in Shanghai, she was not content with being a housewife in Japan. Now that her family has moved back to Shanghai, she somehow got a job distributing a “PC anywhere type” software for an American company. The business is lukewarm. So in order to leverage on her office lease, she, and another partner, opened a beauty salon in the office. They invested RMB 20,000 ($2,400) on three massage beds and other equipment, and bought a RMB 100,000 ($12,000) facial therapy recipe from a Taiwanese businessperson. They hired two skilled facial masseuses – costing only RMB 1,000 ($120) a month each. This business is just starting to take off. Now Mrs. O supervises beauty salon operations while making software sales calls in the same office every day. She is also studying on a remote education program from a top U.K. business school. She will travel to the U.K. to do exams every 6 months. In one year, she will have an MBA degree with a diploma no different from those who physically attend the school in U.K. She joked about how she learned from her MBA textbooks. When she was struggling on advertising her beauty salon, she got inspiration from her Marketing books. She probably pays a lot of money for the entire MBA program, but she thinks that it is well worth of it. In the future, if the family moves back to Japan, Mrs. O can easily find a decent job with both experiences and degrees.

3.      Hotel General Manager

A few friends and I visited Wuxi, a small city about 100 miles north of Shanghai. Because of my friend’s “connection,” we stayed in a 5-star hotel with its general manager treating us like VIP’s. The General Manager, Ms. Z, is a soft-spoken woman in her mid 40’s. Although she seems to be frail in appearance, she, as rumor has it, has a “will of steel.” The hotel is a local government property. For years, it did not have proper maintenance or management as its revenue declined in a market economy. As Ms. Z took the reign of the management position of this hotel, along with a few other smaller properties, she had the dilemma of lacking the funds to improve the property and lacking new customer flows without renovation. Ms. Z used her business connections to get a loan from the bank and invested in several IPO’s in the stock market. Although thought to be crazy in this endeavor, Ms. Z was taking a calculated risk because she had “good information” on the IPO’s. She made a lot of money and used the proceeds to renovate her hotel and to improve the service. Recently, her hotel was upgraded to “5-star,” and the standard room calls for RMB 800 ($100) per night (a 5-Star hotel room in Shanghai costs $150-$250 per night).

Ms. Z works from 7 am (sometimes 6 am) to at least 9 pm every day and maintains an iron-fist policy in the hotel. The service was impeccable to me (but that could be because we were often accompanied by Ms. Z). Ms. Z frequently visits Shanghai and abroad to seek out new trends in the hospitality business. She attended a 3-month training course at the Wharton School a few years ago, paid for by the local government. Her son is studying in North America and calls her every day. She has no plans for her son to stay in North America after his schooling, because she has, in her own words, “laid out the business foundation for him to be successful in China.” After serving us the famous local spare ribs (a secret recipe for hundreds of years), Ms. Z lobbied me to study the feasibility of marketing this dish in America because she could take care of the logistics of supplying trained chefs. I carefully explained to her that I knew nothing about the restaurant business either in China or in New York, and I have a full time job. Ms. Z dismissed my pessimism, “You study too much in America. How do you know that you are not good at it if you do not even try!”

Ms. Z suffers long-term stomach inflammation problems due no small part to her hectic schedule and constant worries over her hotel. Although the local government is all for an incorporation of the hotel and letting the management owning a big chunk of the stock of the property, Ms. Z cannot implement such a strategy without some headwind from employees. People’s understanding of market-driven corporate structure is still quite limited. Employees would have a hard time understanding that the manager would suddenly become the owner of the hotel. Particularly, if the manager begins to lay off unproductive employees, then the conflict is no longer between the state and the people, but between a capitalist boss and the workers. It is not unusual in some parts of China that the longetivity of the newly established individual boss and his family is threatened by disgruntled employees. Ms. Z is very mindful about this potentially explosive issue. But incorporation (or privatization) is the only way to go if the company wants to grow. A new generation of company executives (also shareholders) is being formed. They are transforming the old state-owned enterprises into true public companies. Along with this process, a new group of wealthy individuals is also created.

4. A Local Entrepreneur

I also visited Hang Zhou, a beautiful city about 100 miles south of Shanghai. There I happened to meet an entrepreneur in the textile business. In her mid-40’s, Ms. Wang is in charge of a local textile factory employing over 200 people. The factory was in bad shape a few years ago, as it was mismanaged by local party officials. Ms. Wang pleaded with the local government for her to control the factory. In return, she pays a fixed fee to the local government. The rest of the profit is all hers. With such an incentive, Ms. Wang set out to find more customers. She does not have a high educational background, nor does she have many business connections. But she works very hard and gradually has gained many top hotels in Shanghai as her customers.

Her factory mainly makes cotton bed sheets for hotels. The profit margin is very low because she has to bid for the projects at bottom prices. She does not want to tell me the financial figures on how her factory makes money. But through conversations, I kind of figured it out. The profit margin for any project is low – usually at less than 3%. She obviously cannot make much money at this margin. The customers will pay for the raw material, some of which would be imported. What Ms. Wang can do is to squeeze out some raw material and make about 10% more units of end products. Ms. Wang sells those incremental units “secretively” and can make a very high margin – the raw material is paid for and the incremental labor cost is minimal. Therefore she usually does not like to take on projects that would be exported to foreign customers, for those customers implement very strict controls on imported raw material (like premium cotton from Turkey, etc.) and Ms. Wang cannot make much money on regular shipments.

People like Ms. Wang are a new breed of entrepreneur in China. They did not have the fortune to have a good education, but they are street-smart and hardworking. Even when Ms. Wang was chatting with me, she was knitting some curtains. Her husband was about a similar age but looked much younger. He, on the other hand, is not so “talented,” so all he does is to drive her around in their new sports utility vehicle. Ms. Wang is proud of what she does because, without her, her 200-strong employees would be jobless.

4.      Foot Masseuse

A friend introduced me to a foot massage place. This is the fourth chain store in Shanghai. The boss is a businessman from a western city, and he is very successful in expanding this franchise throughout the country. The foot massage place is clean and is run efficiently. There are 3 classes of masseuses to choose from. The Class-1 masseuse costs about RMB 120 ($15) for 100 minutes of massage.

Miss Li is a Class-1 masseuse working at this place. She is about 21 years old and comes from He Nan province (a central north province). She spent the past 3-years working at different foot massage places throughout the country and recently got her Class-1 certification. She makes about RMB 2,000 ($240) a month – a figure that is not bad at all (entry level masseuse gets only about RMB 600 a month). But she has to work from 10 am to 11 pm, 7 days a week. The boss pays her room and broad, and the shop restricts her time of wandering out of the shop.

Miss Li’s family is still in He Nan. She has one elder brother, who is about 10 years older than she is, and an elder sister, who is about 5 years older. Both live with her parents in the countryside, farming. Her family has about 30 Mu (approx. 5 acres) in land. In the countryside, there is a lot of surplus land. Peasants only need to pay a moderate amount of rice/wheat (can be paid in money) for the right to farm on the land, and they can decide on what to plant. Since many laborers are going into the cities for more high paying jobs, there is no land shortage. The highest-value commodity to be planted is cotton, followed by watermelon, etc. Very few people are still interested in planting rice or wheat. Li’s family has a piece of rudimentary farming machinery to help with the planting. This year the harvest on cotton is pretty bad because of the weather. The family can essentially feed themselves from the land even they have a bad year. One can raise a pig and sell it for about RMB 200 ($24) during the Chinese New Year.

Miss Li sends most of her money back home. In a few years, she will quit her job in Shanghai and go back to the countryside. Her parents will most probably have arranged a marriage for her by then.

Miss Li is content with her work in Shanghai. Her boss pays salaries on time – a rare trait in this field. But lately, her boss is urging employees to buy the company stock in private placements at a minimum RMB 10,000 each. Miss Li is debating if she has to participate because the boss holds weekly meeting and puts pressure on most of the employees. I spent the next half an hour giving her a lesson on finance and convinced her that her boss’s “private placement” was a scheme to get money from his employees.

Miss Li is one of the millions of surplus laborers coming to Shanghai for a better job. The service sector in Shanghai is dominated by laborers from nearby provinces. A fulltime live-in household maid costs only less than RMB 1,000 ($120) a month. A restaurant waiter gets about RMB 500 a month. But in the countryside, those people would be happy to get about RMB 200 a month. These are the backbone of Chinese people. They are amicable and honest people. When I offered to give Miss Li a tip after the massage, she adamantly declined because of the company policy, even though nobody would know.

When asked if she has any plan for her life in the future, Miss Li said that she would let her child go to college so that he/she does not have to be a laborer in the future.

Summary

Don’t let me mislead you into believing that China is becoming a very rich country. Most of my friends in Shanghai belong to the top 1% of wealthy people, and they do not represent life of most Chinese. Shanghai is a particularly strange place for me, for its extraordinary development, progress and its lack of sympathy towards the under-privileged. The urge to make money is relentless, and that has led to a surge in corruption, both monetarily and mentally. The old Shanghai that I knew no longer exists; instead, I see a modern city filled with every element of capitalism. It is both exciting and intimidating for me.

Allen Huang

December 12, 2003

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