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CHEUNG KONG
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Volume No. 27
FALL 2017 $12.00

Is China Ready to Lead?

· Is the ‘sharing economy’ everything it is purported to be?
· Understanding state-owned enterprise reform
· China’s automobile industry is going electric
· China’s engagement in Africa is deepening
Table of Contents Fall 2017

Comment Innovation Dan Harris, lawyer at Harris Bricken, 50

draws on his decades of work providing legal
A Confucian Renaissance 6 Space: China on the Final Frontier 13 help to foreign enterprises in China to shine a
China’s success has some asking whether light on China’s shifting legal landscape
China may be far behind the US in terms
the Middle Kingdom is ready to lead the of space development, but it is already a Business Barometer 46
world—it may not be, but it can make big significant power and catching up
contributions Latest figures on economic growth and
Brian Christian, author most recently of 18 business sentiment
Globalization Algorithms to Live By, discusses the gaps
and overlaps between humans and machines Company
BGI’s Gene Dreams 54
8 Following a very successful IPO, China’s
biggest genetics company is continuing to
evolve

59

21
Africa: A Long-term Engagement 8 China’s Two-speed Auto Market 21
Like its whole economy, China’s auto market Gill Zhou, IBM’s Greater China
China has been involved in Africa for
is changing. Breakneck growth is now past CMO, talks about Big Blue’s
longer than one might at first guess, but its
engagement with the continent has only and innovation, specifically in continuous market dominance
recently been deepening new-energy vehicles, is the future over more than a century
Kapil Kane, Director of Innovation at Intel 25
China, gives us the inside story of his Downtime
Issue: Fall 2017
Ideas2Reality program, which turns
Vol. No. 27
engineers into “intrapreneurs”
Editor-in-Chief 63
Zhou Li
Economy & Finance
Senior editor
Greg Langley
Managing Editor 30
Tom Nunlist
Coordination
Deng Yuanyuan, Liu Sha China’s Music Scene
Design Popular music in China may be
Jason Wong poised to break through to the
Cover State-owned Reform wider world
Wei Bingnan China’s massive state sector is
Produced By
going through massive reforms China Data 66
SinoMedia From video games and nuclear fusion, to
wastewater and marijuana, the numbers you
ISSN 2312-9905 China’s Stocks Go Mainstream 36 need to know
After several years of denials, Chinese
Publisher
mainland equities finally gained entrance into Xiong’an New Area 68
CKGSB GLOBAL LIMITED
MSCI—but its markets have not exactly been Earlier this year, China announced the
Suite 3203, 32/F, Champion Tower, creation of its special economic and
“Westernized”
3 Garden Road, development zone, Xiong’an New Area.
Central, Hong Kong China’s Offbeat Sharing Economy 41 What was it before, and what will it become?
The so-called “sharing economy” has
For Letters to the Editor or reprint requests,
exploded in the past year. But with borrowed Bookshelf 70
please contact: Must-read books on China, economics and
basketballs and communal chargers, can its
[email protected] history from former UBS Chief Economist
influence really last?
George Magnus
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Letter from the Editor Fall 2017

Entering a New Age

A
fter four decades of economic Two more Q&As come from the more

CKGSB
growth, China has become a CHEUNG KONG strictly business world. Gill Zhou, Great-
powerful country—its capacity er China CMO for IBM, talks about Big
GRADUATE SCHOOL
OF BUSINESS

as world manufacturer and appetite for K N O W L E D G E Blue’s continued evolution, as well as the
Volume No. 27
FALL 2017

raw materials and, increasingly, high-end evolution of the marketing department in

$12.00

consumer goods are now major drivers the digital era (page 59). Lawyer Dan Har-
of the global economy. But while China ris of Harris Bricken draws on his decades
is already taking a more active role in of experience providing legal help to for-
shaping the wider world, is it ready to be eign enterprises in China to provide insight
the “leader” of the global order? into broad shifts in China’s legal landscape
We address this question in this issue’s (page 50).
Comment (page 6). Leading the world re- China is also, of course, going out to
quires more than economic strength, and the world more and more these days, but
even in that arena China is weaker than the this is not exactly a new phenomenon,
headline numbers would sometimes sug- particularly in Africa. Read about China’s
gest. It can, however, contribute greatly to Is China Ready to Lead? commitment to the continent in “A Long-
reshaping global values, most particularly term Commitment” (page 8). Finally, we
· Is the ‘sharing economy’ everything it is purported to be?
· Understanding state-owned enterprise reform
· China’s automobile industry is going electric

through the promotion of Confucian ethics leave you with a lighter, but nonetheless
· China’s engagement in Africa is deepening

as a counterbalance to the weak points of important, story on China’s music indus-

liberal capitalism. try, which may be on the cusp of breaking
Our lead story, “Piece by Piece,” (page through to global consciousness, in “China
30) delves into one of the most important, and arguably most mis- Moves to the Beat” (page 63).
understood, elements of the Chinese economy: state-owned enter- As always, there is more than enough in this issue to think about
prises (SOE). Reform of this sector is vital for China to create a and to discuss. If you have any comments or opinions to contribute,
healthier economy, but “reform” does not, as it did once, necessarily we would love to hear from you.
equate to privatization or a retreat of the state. This time round, it is ([email protected] or [email protected]).
a strengthening of it. Another area where reform and change is evi-
dent is in China’s equities markets, which MSCI formally acknowl-
edged earlier this year. Read about the state of China’s markets in
“China Stocks Go Mainstream” (page 36).
This issue of CKGSB Knowledge is heavy on technology, sci- Yours Sincerely,
ence and innovation. Beyond the state-controlled economy is the
so-called “sharing economy,” which in China is booming this
year—perhaps too much. Get a detailed analysis of the situation in
“Sharing Economy on Borrowed Time?” (page 41) Another area of
intense innovation is China’s auto industry, which is experiencing
a broad government-backed switch to new-energy vehicles—find
out more in “China’s Two-speed Auto Market” (page 21), and then
blast off to the final frontier with “China’s Rocketing Space Indus- Zhou Li
try” (page 13), before taking in China’s efforts at exploring and Assistant Dean, CKGSB
commercializing the smaller end of the universe in “BGI’s Gene
Dreams” (page 54), about China’s biggest genetics company. We For more insights on the Chinese economy and business, please
also bring you Q&As from very different areas of technology. Intel visit the CKGSB Knowledge site: http://knowledge.ckgsb.edu.cn/
Director of Innovation Kapil Kane describes how he helps to turn
Intel engineers into tech entrepreneurs (page 25), and author Brian
Christian discusses man and machine on a more philosophical level
(page 18).

CKGSB Knowledge 2017

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Comment

Is China Ready to Lead?

China offers world leadership a complementary viewpoint

C
hina’s growing economic power—
combined with the perception that
the US is retreating from global mat-
ters under the Trump administration—has
many people calling for more active Chi-
Confucianism has great potential
nese leadership in the world, albeit for dif-
ferent reasons. Many developing nations to offer a new dimension to the
see China as a champion and as an inves-
tor. Western countries wish to see China
shoulder a greater share of the burden of
world’s common values system
global leadership, and a growing number of
Chinese citizens want China to reclaim its
ancient role of international paramountcy. 1) Shifting Gears: After three decades of as- prises (SOEs), to stabilize the economy.
But is China ready to “lead the world?” tounding growth, the Chinese economy Inefficient SOEs suck resources from
Has it reached the stage where it can set is slowing down. Since the 2008 World the private sector. According to Gavekal
the international tone, take the central role Financial Crisis, China has been pushing Dragonomics, a Beijing-based economic
on global issues and provide preeminent to switch its economy from being export consulting firm, state companies obtain
guidance toward the future? With China’s and investment-driven to consumption almost 30% of all loans but contribute
pledge at the World Economic Forum in and innovation-led. Such fundamental less than 10% of GDP.
January to defend global free trade and sup- changes do not happen overnight. 4) Trapped Redback: Despite the accep-
port the Paris climate agreement, just as the 2) Big Economy and a Large, Poor Popula- tance of the RMB by a handful coun-
United States seemed to be abdicating its tion: Although China in absolute terms is tries as a settling currency for trade with
roles in both arenas, the answer for some the second-largest economy behind the China, the “redback” is still under strict
was a “yes.” US, it ranks only 71st in per capita GDP control and is not yet fully convertible.
That may be a premature assessment. terms, close to the level of Mexico and Because of the government’s emphasis
Kazakhstan. People can be misled about on maintaining financial stability, full
Perceptions and Reality China’s wealth if they only see Shang- convertibility of the RMB cannot be
Economic strength, while important, is far hai’s futuristic skyline with its growing expected any time soon. Envisioning an
from the sole factor in determining a na- forest of supertall skyscrapers. They may economy with such a tightly controlled
tion’s global influence. In the early 1800s, find it hard to believe that almost 11 mil- currency as ready to set global policy is
China was the world’s largest economy, lion people in China lived on less than difficult.
but the country projecting itself around the $3.10 a day in 2013, notwithstanding the But while China may currently lack the
globe was a small island nation in northern Chinese government’s historic achieve- capacity to lead the world, that does not
Europe, the United Kingdom. And although ments in lifting more than 700 mil- mean it has nothing to contribute to global
the United States overtook the UK as the lion people out of extreme poverty (the leadership. Far from it.
world’s largest economy around 1890, it World Bank’s poverty line is $1.90 per
didn’t become the globally dominant power day). The fact is, China’s economy is not Global Problems,
until after World War II. yet rich and is far behind that of Japan, Chinese Solutions
China, of course, has only recently re- which is both rich and “old” while China The discussion about China’s leadership
claimed its position as an economic power- is becoming “old” before it is rich. role in the world is not simply the result of
house. The foundations of that powerhouse 3) Constrained Market: Reform of the in- the expansion of the Chinese economy, al-
economy are actually weaker than they efficient state sector lost momentum in though that is important. It also stems from
seem for several reasons, including the fol- 2008 when China undertook massive a parallel crisis of faith in the current global
lowing: stimulus spending via state-owned enter- order. The fall of Leman Brothers in 2008

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triggered a new era of skepticism toward into universal values. One can become nect with the basics of Chinese culture
capitalism. a Confucian Christian, Muslim or Bud- with skepticism. Is it sincere? Does it in-
The surprise success of Thomas Piket- dhist. As Professor Tu suggests, the clude the possibility of Samuel Hunting-
ty’s 2013 book, Capital in the Twenty-first values of compassion, social justice, ton’s “clash of civilizations,” a springing
Century, describing the return to wealth moral standards and sense of responsi- of the Thucydides trap by cultural nation-
inequality, is another sign. Indeed, Piketty bility in the revised Confucianism are alism?
argues that the progressive concentration of complementary to those of rationality, This fear is misplaced. China’s contri-
wealth is an inherent feature of the liberal individual freedom and human rights bution to the world of its ancient philoso-
capitalist system. That should come as no emphasized in the Western tradition. phies does not mean “taking over” in any
surprise given the explicit responsibility of 2) Re-engagement at Home: Today, peo- sense of the phrase, but rather the emer-
companies to shareholders rather than to ple at all levels of society in China have gence of a new, more cooperative and in-
society. re-engaged with national history and clusive form of the global values system
After driving economic growth for the Confucianism, from the very top—Xi that marries the technology, progressive-
past few centuries, capitalism has been in- Jinping delivered a keynote speech at ness and individualism of Western liberal
creasingly challenged on how social good, the 2,565th Anniversary of Confucius’ capitalism, with the moral temperance, hu-
at national and global levels, is created Birth in 2014—down to the bottom, manity and mutual responsibility of Con-
and maintained. In this regard, however, where schoolchildren are learning the fucianism. This is contrary to Hunting-
China has much to offer to the global dis- basics of Confucian morality. Xi often ton’s prediction of a clash between what
cussion—specifically, values found in tra- quotes Confucius in his speeches. In his he called “Sinic Civilization” (China, Ko-
ditional Chinese culture, most particularly 2014 speech, he stated that “contempo- rea and Vietnam), and “Western Civiliza-
Confucianism. rary human beings face such outstand- tion.”
ing problems as widening wealth gaps, But the challenge of sharing Con-
A Chinese Renaissance endless greed for materialistic satisfac- fucianism with the world falls on the
Confucianism is commonly perceived as tion and luxury, unrestrained extreme Chinese. Since the time of Confucius in
a philosophy of hierarchy that favors the individualism, continuous decline of roughly 500 BCE, and especially since
rulers. But growing interest in Chinese cul- social credit, ever-degrading ethics and Confucianism became the state philoso-
ture, a bi-product of China’s economic suc- increasing tension between man and na- phy in the Han Dynasty, the ideas of Con-
cess, means more people are going back to ture.” He encouraged people to find an- fucius have been interpreted and modified
ancient texts to rediscover the true values swers to those issues by leveraging an- many times. Importantly, it was the object
of Confucianism. Some compare this to the cient wisdom, including Confucianism. of criticism in mainland China for almost
revisiting of Greek and Roman classics in 3) Asian Origin, Global Impact: Thanks a century.
Renaissance Europe. to China’s increased importance in the Today, there are many versions of
The foundations of Confucianism are world and Tu’s influence in academia, Confucianism in China and in other parts
the Five Constants: Humanity, Righteous- the World Congress of Philosophy, of the world. Through more exchanges
ness, Propriety, Wisdom and Sincerity. held every five years, will take place between government officials, academics
(They used to be translated as Benevolence, in Beijing next year. According to Tu, and business people, China needs to be-
Justice, Order, Knowledge and Integrity.) not only were people in Japan, Korea come better at articulating the core values
Overall, there is an emphasis on humanity and Vietnam once strongly influenced of Confucianism among its own people as
and harmony, and especially on the greater by Confucianism, but so were some it starts engaging in serious dialogue with
good of society. These are the exact aspects of the Enlightenment’s great thinkers other nations on the global stage.
that liberal capitalism is accused of lack- such as Voltaire, Quesnay and Leibniz. Regardless of the calls for China to
ing—indeed, the lack of concern for the In Tu’s view, traditional Asian values take on global leadership, the reality is that
little guy underpins the recent global back- can become a new set of values for the it will take years, or even decades, before
lash against the “elites.” world. Indeed it is interesting to notice China’s economy is sufficiently strong and
Confucianism has great potential to of- that Confucianism is gaining popularity further reforms have taken root. On the
fer a new dimension to the common values amongst the younger generation in the cultural front, however, China now has an
system of the world because of its nature West—Chinese philosophy is now one opportunity to start a dialogue with other
and history. of the most popular courses at Harvard, major nations by rediscovering its ancient
1) A Philosophy for All: Professor Tu third only to “Introduction to Computer values. Its concept of Tianxia, or “all un-
Weiming, a world leading scholar of Science” and “Principles of Economics.” der heaven,” may offer a new and univer-
Confucianism, suggests that the core sally accepted perspective as the world re-
Confucian values of humanity and pro- Common Aspirations globalizes, with or without China’s
priety can be new parameters to add Some in the West view the effort to recon- leadership. — Zhou Li

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Globalization

A Long-term Engagement
China’s evolving role in Africa
By Jens Kastner
Image by Lisa Ye

8 / CKGSB Knowledge 2017

 Fall 2017

China has been

F
ortunately, no one was injured when mates that Chinese firms already handle
a $12 million bridge being built by 12% of Africa’s industrial production, val-
quietly involved a Chinese firm in Western Kenya
collapsed before it was opened last June,
ued at $500 billion a year.
But like high-profile infrastructure
in Africa for though the incident was an embarrassment
for Kenyan President Uhuru Kenyatta.
projects, private ventures can have mixed
results, says Jilles Djon, Director of Opera-
decades, but it is Then campaigning for re-election on poli-
cies that included infrastructure develop-
tion at the Shanghai-office of the African
Chamber of Commerce (AFCHAM). In
only recently that ment and Chinese partnerships, he had been
to “inspect” the Sigiri bridge as part of his
the two years Cameroon-born Djon has
held the position of AFCHAM’s Director
the relationship campaign only two weeks before.
Shortly afterward, the Chinese-built
of Business Operations, he has seen more
individual Chinese entrepreneurs fail in Af-
has taken Nairobi-Mombasa rail project opened 18
months earlier than planned. The 470-kilo-
rica than succeed.
“Some cut corners by not paying for
on dramatic meter (290 mile) line slashes travel time to
four-and-a-half hours—half of the time re-
feasibility studies and some make the mis-
take of entering multiple African countries
importance, both quired by bus—but the $4 billion price tag
raised eyebrows. Critics claim the cost was
at the same time,” Djon says.
Successes, however, are impressive. In
economically and inflated because the project was rushed for
political purposes and now risks saddling
2016, jobs created from Chinese FDI proj-
ects hit an all-time high of 38,400, more
politically the nation with monstrous debts to China
for decades to come.
than double the number in 2015 and more
than three times the number created by the
Although Kenyatta won re-election in next biggest investor, the US, according to
August, the policy of Chinese engagement EY (formerly Ernst & Young). More im-
with Kenya’s economy is clearly being portantly, Chinese firms are bringing capi-
questioned. This stands in contrast to Ethio- tal investment, management know-how
pia where a new Chinese-built railway, also and entrepreneurial energy, all of which are
costing $4 billion, links the capital city, helping to accelerate the progress of Af-
Addis Ababa, to the port of Djibouti on the rica’s economies.
Arabian Sea. “In the past, China saw Africa only as a
With services still ramping up, the line market for Chinese-made goods or a source
promises to cut transport time between the for raw materials for the Chinese economy,
two locations from three days to 10 hours. but that has been changing amid different
The hope is that Africa’s first fully-electri- initiatives by the Chinese government to
fied cross-border line will at last provide encourage companies to go abroad, such as
access to global shipping lanes for Ethiopia OBOR [One Belt, One Road],” says Djon.
just as the east African country is develop- “This, in turn, makes more Chinese private
ing into a textile hub. sector players willing to put up with the
The two tales reflect the complexity of risks of entering the unknown.”
China’s expanding involvement in Africa.
Total Chinese investment in the continent Depletion to Development
reached $3.5 trillion by the end of 2015, Africa’s 54 countries comprise an area
nearly seven times the 2007 figure. In the more than three times the size of China,
first six months of 2017, Chinese foreign and Chinese interest varies enormously by
direct investment (FDI) into Africa was geography. Companies engaged in resource
$1.6 billion, up 22% from a year earlier, extraction—mining, petroleum, timber—
while imports from Africa jumped 46% to for export to China are concentrated in An-
$38.4 billion, according to China’s Minis- gola, Congo, Guinea and Zambia as well as
try of Commerce (MOFCOM). South Africa.
Altogether there are around 10,000 Manufacturers have been drawn to
Chinese firms operating in Africa, 90% of populous Nigeria and Ethiopia, on opposite
them private, according to a recent report coasts. Agricultural producers focus on Ke-
by McKinsey. The same report also esti- nya. There also is considerable engagement

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Globalization

north of the Sahara desert: almost a quarter pany designs refrigerators specifically for phone penetration rate of 50-60%, manu-
of Chinese FDI projects in Africa in 2016 African needs by making the freezing tem- facturing such complex devices in Africa is
were in Egypt, according to data compiled peratures much lower than usual. “Power likely some ways off.
by EY. outages are commonplace in Africa, but “You would not readily set up a factory
Over the last decade, the focus has that kind of refrigerator will keep the food if you cannot even source basic things such
moved from resource extraction and farm- fresh without electricity for up to three as battery chargers locally,” Srivastava
ing toward manufacturing. Benjamin Cav- days,” says Cavender. says.
ender, Associate Principal with Shanghai- Likewise, the overwhelming success of
based China Market Research, who has Chinese mobile phone brands in Africa is History, Diplomacy, Economy
frequently visited Africa on behalf of in- built on localization. Data from the India- China’s involvement in Africa has received
ternational investment funds, attributes the based technology consultancy Counter- much recent coverage, but it is not entirely
change to several factors. point Research shows affordable mobile a new phenomenon. One of the earliest
“Many companies have trouble manu- device brands Tecno and itel, both owned contacts was by famed admiral Zheng He,
facturing cheaply in China because wages by Shenzhen-based Transsion Holdings, who made a once-off voyage to Africa in
have risen,” Cavender explains. took the third and first spot respectively the 15th century. But direct involvement
Another reason is that African coun- in the African mobile market in the third remained minimal before the modern era.
tries’ have high import tariffs, especially quarter of 2016. Taken together, Transsion When Mao Zedong declared the Peo-
on electronics. This makes Africa-based has grabbed 40% of the African market, ple’s Republic of China in 1949, most of
Africa was controlled by Western colo-
nial countries, which had subjugated the
continent in the 19th century. In the early
Power outages are commonplace years of the PRC, China used aid to spread
the Communist message and to challenge
in Africa, but [Chinese-made] the international influence of its rival, the
Kuomintang-dominated government based
refrigerators will keep the food fresh in Taiwan, which still claimed dominion
without electricity for up to three days over the mainland.
“Their civil war became a diplomatic
war, fought in the halls of ministries of
Benjamin Cavender foreign affairs across the third world,”
writes Deborah Brautigam, author of The
Associate Principal Dragon’s Gift, published in 2009. “Ideol-
ogy and political strategy were then the pri-
China Market Research mary thrusts behind China’s extensive aid
program.”
China’s financial help has also clashed
production more attractive. Owing to weak out-competing much bigger opponents like with Western efforts, not least because Af-
local supply chains, manufacturing focuses Samsung. rican leaders often preferred China’s “non-
on assembly of imported parts of electron- “Chinese smartphones and feature interference” policy. This generally means
ics, home appliances, vehicles, fashion and phones have bigger batteries because elec- it does not link human rights or governance
footwear in Ethiopia, Nigeria and South tric sockets for recharging may not be read- issues to aid and economic cooperation.
Africa, Africa’s largest markets. ily available to the African consumer,” A key event in crafting non-interference
Other drivers have been the devaluation says Shobhit Srivastava, Research Analyst while increasing investment was a 1995 Af-
of African currencies versus the RMB, as at Counterpoint. “Similarly, these phones rica trip by Zhu Rongji, who became Chi-
well as the EU’s extension of preferential have two or three slots for SIM cards rather na’s Premier three years later. Zhu visited
treatment to exports from Africa compared than one, as signal coverage remains patchy the Tanzania-Zambia (Tan-Zam) Railroad,
to exports from China. Cavender also sees and a substantial number of Africans com- the largest and most expensive foreign aid
tremendous opportunity for growth in the mute across borders.” project China had undertaken up to that
local markets themselves, with Chinese However, most phones are made in time.
companies tending to adapt to local needs China and shipped over to Africa. Srivas- The 1,162-mile long railway was con-
faster than Western peers. tava notes that while sales of mobile phones structed in the early 1970s to upstage the
He points to Hisense, a Chinese home in Africa are likely to continue doing well Soviet Union’s foreign aid efforts in the
appliance-maker, as an example. The com- due to the continent’s relatively low smart- region. According to John F. Copper, an

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American political scientist and the author from the Chinese development playbook. event marking the deepening of China’s
of China’s Foreign Aid and Investment Di- Most prominent was the special economic long-term commitment came in July, when
plomacy, Tan-Zam was a resounding politi- zone (SEZs) initiated by the Deng Xiaop- China dispatched military personnel to set
cal success for China, but a practical night- ing reforms in the late 1970s, which attract- up its first-ever overseas base in Djibouti,
mare, suffering from construction issues, ed foreign capital and fostered economic the small, but strategically-placed country
frequent engine breakdowns and financial growth. The SEZs have been a huge suc- on the Gulf of Aden.
losses. But Zhu Rongji deftly turned the cess, and building such zones abroad would China’s agreement with Djibouti estab-
railway’s shortfalls into an opportunity for expand China’s trade opportunities. lishes a military presence in the country un-
engagement. The first African SEZ was established til at least 2026, with a contingent of up to
“When Zhu visited in 1995, he cited the in Zambia in 2007. There are now seven 10,000 soldiers, according to international
problems the Tan-Zam Railroad had en- zones: in Algeria, Egypt, Ethiopia, Mauri- current affairs magazine The Diplomat. Its
countered and promised to do something,” tius, Nigeria (two), and Zambia. stated purpose is to resupply navy ships
said Copper. “The bulk of Chinese investment goes taking part in peacekeeping and humanitar-
Then-President Jiang Zemin toured Af- into zones and industrial parks, where there ian missions off the coasts of Yemen and
rica the next year. He later spearheaded the is cheap power because of [Chinese-built] Somalia.
Forum on China–Africa Cooperation (FO- hydro dams and low taxes,” said Charlotte Another apparent aim reflects increas-
CAC), which paved the way for the rise in King, Africa Lead Analyst of the Econo- ing risks: to be ready to evacuate Chinese
Chinese investment in Africa. FOCAC has mist Intelligence Unit, a UK-based think nationals from the region. China has al-
been held five times since 2000, bringing tank. “These zones embody China’s ap- ready been forced to do this in recent years
together more than 80 ministers from China proach: paving the way in Africa with help during the Yemen and South Sudan civil
and 44 countries and representatives from of government-government MOUs [Mem- wars, as well as from Libya, when Western
more than a dozen international and region- orandums of Understanding] and letting the coalition forces toppled Muammar Gad-
al organizations. China’s aid pledges made private sector doing the heavy lifting.” dafi. But there are additional, even longer-
within the framework of FOCAC included term considerations in play.
building economic zones in Africa that at- Uncharted Territory “Although China will not say so, the
tracted considerable funds and were effec- As China’s momentum in Africa has Djibouti base extends its global power as
tive in promoting economic growth. picked up, so too has the need to expand its blue water navy needs support facili-
According to Copper, the idea comes beyond economic involvement. A key ties there and in other parts of world,” says

Building a Continent
Chinese investment in Africa by industry, 2015

Source: Caixin

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Globalization

On the platform of the Chinese-built Ethiopia-Djibouti Railway

David Shinn, a professor who served as US difficult for African manufacturers to com- polled in 36 African countries felt that Chi-
Ambassador to Ethiopia and Burkina Faso. pete.” Neither the export nor import issues na’s influence in their countries was some-
“Depending how China uses the Djibouti are close to being resolved. what to very positive. At the same time, the
base, it may signal the end of the non-inter- Osita Agbu, Professor of International July McKinsey report showed that nearly a
ference policy,” he adds. Relations at the Nigerian Institute of In- quarter of the Chinese firms in Africa said
One pressing question stemming from ternational Affairs, has a different take. they had covered their initial investment
China’s engagement is if it is helping sta- According to him, the trade deficit is not within a year or less.
bilize Africa, which, unfortunately, is ac- dangerous as it reflects the importation not The main threat to China’s growing
customed to a certain amount of turmoil. only of Chinese consumer goods but also relationship with Africa is probably insta-
Western voices often accuse China, with its machinery and equipment needed to make bility in African countries. For example,
policy of non-interference, of fueling cor- African economies reasonably competitive. Kenyan President Kenyatta, who was em-
ruption and civil wars in Africa. They also “The point is that while China does barrassed by the Chinese bridge collapse,
accuse Chinese FDI of exploiting Africa’s have a big role in Nigeria, we never had won re-election in August in a contest that
weak environmental regulations. African serious problems with them,” Agbu says. was then annulled by the Kenyan Supreme
voices also often decry the loss of jobs re- “The Chinese are setting up the Tinapa Court.
sulting from Chinese imports flooding the Free Trade Zone in Calabar [in southern Tensions escalated with many fear-
market and the low wages Chinese firms Nigeria] and the Lekki Free Trade Zone in ing a repeat of the 2007 election standoff
active in Africa pay to local employees. Lagos [Nigeria’s largest city with a popula- when a disputed presidential poll resulted
Shinn, in his opinion, says that the short tion of some 16 million]. With their ports, in the deaths of more than 1,000 people and
answer is yes, China is helping to stabilize warehouses and connecting infrastructure, weeks of bloodletting. And it is important
Africa. However, the full picture must in- these zones will ensure international trans- to keep in mind that Kenya is viewed as one
clude the risks associated with the large actions that will be good for the future of of the more politically stable of Africa’s
trade surpluses China has developed with Nigeria, as well as that of the whole west countries.
African countries in recent years, except coast of Africa.” But Copper, the old African hand,
those exporting natural resources to China. downplays fears of such political mishaps
“If that trend continues it could be Positive, but Uncertain derailing the long-term China-Africa coop-
harmful to Africa,” Shinn says. “The other The balance currently seems to be a win- eration. “This project is so big and has been
issue is that there are so many value-added win. A recent survey by pollster Afroba- so successful it can no doubt weather a few
goods coming in from Asia that it makes it rometer showed 63% of 56,000 people storms,” he says.

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China’s Rocketing Space

Industry
Another player arrives at the final frontier
By Helen Roxsburgh
Image by Beibei Nie

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Innovation

China’s space
W
hen the 2,600-pound goddess of support by Mao Zedong, who saw it largely
the moon finally let her jade rabbit as a military undertaking.
program is still out, it first turned a victory circle
on the powdery lunar regolith before trun-
Chinese engineer Qian Xuesen was
known as the “Father of Chinese Rock-
far behind that of dling away. The goddess was Chang’e 3
(from Chinese mythology), an unmanned
etry.” He studied in the United States in
1935 and was later recruited to Caltech
the United States, lunar lander, and the jade rabbit was Yutu,
a lunar rover. The day was December 14,
where he worked on developments that
included the founding of the Jet Propul-
but it has fast 2013, and as Chang’e 3 touched gingerly
down, it marked the first soft landing on the
sion Laboratory. When he returned home
in 1955, he helped lead a nuclear weapons
caught up with moon in almost four decades—and a mile-
stone in the development of China’s grow-
program that led to China’s first successful
atomic bomb and hydrogen bomb tests. He
other nations. The ing space power.
In an age when governments and pri-
also headed China’s ballistic missile pro-
gram, and then, naturally, the early Chi-
implications of vate companies alike are set on human
exploration of Mars, another moon land-
nese space program.
Despite this early start, China’s focus
China’s presence ing may seem like back-page news. China,
however, has long viewed its space pro-
on space lapsed during the following de-
cades of turmoil. It wasn’t until the 1990s
in space are gram as important to bolstering national
prestige and influence, boosting national
that China’s space program began to ac-
celerate. In 2003, China became the third
far-reaching, defense, and promoting domestic industries
and economic realignment.
country to put a man in space with its own
rocket (after the Soviet Union and the US).
in terms of “Exploring the vast universe, develop-
ing space programs and becoming an aero-
In 2008, Chinese astronauts made the coun-
try’s first spacewalk—and momentum has
economics, space power have always been the dream
we’ve been striving for,” President Xi Jin-
been growing ever since.
“The space-science program in China
technology and ping said on China’s first Space Day on
April 24, 2016. That date was the anniver-
is extremely dynamic and innovative,”
Johann-Dietrich Wörner, Director General
the military sary of the launch of China’s first satellite,
the Dong Fang Hong I (The East is Red I),
of the European Space Agency (ESA) said
recently at a Paris meeting. “It’s at the fore-
which reached orbit in 1970. front of scientific discovery.”
Beijing arrived late to the final frontier, Today, China has more than 100 satel-
but is making ambitious efforts to catch up. lites in space, launched mostly from loca-
By 2018, it aims to send a probe to the dark tions in the south of the country, including
side of the moon—the first-ever such trip— the newly-built Wenchang Satellite Launch
and to put astronauts on the moon by 2036. Centre on Hainan Island. Its most recent
While space may be the most difficult successful launches include the Long
environment to conquer, the challenges are March 7 rocket last July. In 2016, it con-
not only technical. China must compete ducted a total of 22 space missions, tying
against more established players, allay in- with United States for the country with the
ternational security fears, as well as bal- most launches.
ance the considerable cost of a space pro- “China’s success is in laying out a
gram against other considerations, such as long-range plan and sticking to it,” says
public opinion concerned about a slowing John Logsdon, Professor Emeritus of Po-
economy. litical Science and International Affairs
at the George Washington University.
Looking to the Stars “China’s various Five-Year Plans for its
China’s celestial endeavors date back seven space program have been made public and
decades. In 1956, China developed its first executed. It’s about having a long-range
rocket and missile research institute—two vision that space is an important area of
years before the creation of NASA. In the competence and capabilities, and step-by-
early years of the People’s Republic, Chi- step developing world-class technologies
na’s space program was given significant and capabilities.”

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Long-term planning was evident in run by the International Space University. complex. China’s space launch facilities
April when Tianzhou-1, China’s big- “The summer program brings together are also all run by the military.”
gest and heaviest spaceship to date, was people from around 26 different countries This has made some international
launched. It docked with the Tiangong II for an intensive program on all aspects of agencies wary of working too closely with
space lab, launched last September, and space,” says Logsdon, “China has been the Beijing. Others fear China might allow its
conducted in-orbit refueling—a challenge largest participant for the last ten years. Of space program to be used by countries with
at the edge of technical capacities in space. the 120 people there this year, 25 are Chi- more aggressive purposes.
While the Soviet Union was the first to pull nese. Sending people for that kind of train- “The major concern is that China
off docking between unmanned ships in ing is just one example of China’s focus on [could] become a country supporting things
1967, in-orbit refueling is an engineering developing human capabilities.” like missile development in places like
feat that has only been completed a handful China is also a member of the UN Com- North Korea and Iran,” says Denis Simon,
of times. mittee on the Peaceful Uses of Outer Space Executive Vice Chancellor of Duke Kun-
The launch of Tianzhou-1 is a crucial and the UN Platform for Space-based In- shan University, and an expert on Chinese
step towards two of Beijing’s most impor- formation for Disaster Management. For science policy. “The more China becomes
tant goals: to send a rover to Mars by 2020 many decades, however, China’s space embedded in the larger fabric of the global
and to launch and resupply a manned space program has raised suspicions because of space industry, the more responsibility Chi-
station by 2022. China is also testing the its military links. na has to take for being cautious and vigi-
ability of astronauts to stay on the moon for “China’s space capabilities are closely lant that its technologies do not get used for
extended periods. A current experiment has linked to its military,” says Dean Cheng, nefarious purposes.”
volunteers live in a “simulated space cabin” Senior Research Fellow at The Heritage
for 200 days at a time, helping scientists Foundation. “The Ministry of Industry Earthly Challenges
understand what is needed for humans to and Information Technology (MIIT) is in Even with the rapid pace of advancement in
remain on the moon for long periods. overall charge of China’s space industries, China, conquering space is no mean feat—
which are all state-owned enterprises. MIIT it is fraught with danger, both technical and
Power Vacuum is also in charge of the defense industrial political, and failures are inevitable. Last
Space programs have always been closely
linked with international relations, defense
and military goals, and China is no excep-
Budgeting for Beyond
tion. China’s answer to NASA is the state- China is now the world’s No. 2 space spender
run China National Space Administration 39,332
(CNSA), established in 1993, which holds
responsibility for planning and developing
space activities.
Tian Yulong, CNSA’s Secretary Gen-
eral, told an international conference in
April that China has signed more than
100 space-cooperation agreements with
30 countries and space agencies. But even
with this international collaboration, China
has had to develop its own domestic talent
from scratch, with the talent pipeline cen-
tered on the prestigious Beijing University
of Aeronautics and Astronautics.
“The failure of groups like NASA to
work with China has to some extent incen- 6,111 5,265
tivized and motivated China to do more 3,597
2,713
themselves on growing talent, as a matter 1,687 1,223
1,159 474 367
of domestic pride and sustainability,” says
Richard Suttmeier, an expert in China’s sci-
ence policy.
China has also been an enthusiastic par-
ticipant in international training programs,
Source: World Economic Forum/OECD
including a nine-week summer program

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Innovation

July, China’s launch of its new heavy-lift sile and space technology that improves space technology, particularly from neigh-
rocket, the Long March-5 Y2, failed while PRC military and intelligence capabilities.” boring India. Already a space power, India
carrying its heaviest-ever satellite. This Although China has denied the claims, launched a satellite into orbit around Mars
failure could delay future projects, such as and nobody has ever been convicted, this in 2014, the only country to do so on the
the planned rover flight to the far side of the thinking has influenced China-US scientific first attempt. Meanwhile, Russia is still
moon in 2018. collaboration for decades. the only nation that can regularly launch
However, Denis Simon estimates the “It hasn’t been easy for China, which humans into space and bring them back,
Chinese have a 97% success rate with rock- has faced issues about access to technology sending about four crews every year to the
et launches, which is a very low rate of fail- because of the close linkage between the ci- International Space Station. But at $6.1 bil-
ure. And there are huge gains in prospect. vilian space and military space programs,” lion in 2013, China’s financial commitment
China’s manned space station, if launched says Simon. “Access to foreign technology is larger than that of India, Russia and Ja-
as planned in 2022, could potentially be- has been difficult… China has done a great pan individually—although that is still well
come the only one in orbit, as the Interna- deal through self-reliance and through in- behind NASA’s 2013 budget of $39 billion.
tional Space Station approaches the end of digenous innovation.”
its planned service life. Simon continues: “It is only recently Private Space
“If the International Space Station is that space collaboration has picked up with President Xi hopes the space missions will
de-orbited in 2024, and there is no replace- the US, and it’s done so with a great deal fuel a wave of Chinese innovation in robot-
ment, then it is likely that China’s space of caution. So, China has worked with a ics, aviation, astronautics and AI to help
station, scheduled for launch around 2020, number of other countries and the Euro- boost the economy. The state is also provid-
would be the only space station,” says pean Space Agency to jointly advance and ing support for the emerging private space
Cheng, although experts disagree on the develop their space capabilities.” sector. Although there are only around a
likelihood of this scenario due to political Indeed, the CNSA has ramped up dozen commercial space enterprises in the
tensions. space-science efforts and collaborative country, the nascent sector has attracted
Because of the global security concerns projects, including a pioneering $440m X- significant investment.
that have dogged China’s space program, ray telescope, which is planned for launch In May, rocket design startup One
the country has had to build up much of its by 2025. The mission is financed with Eu- Space Technology announced that, months
knowledge domestically, as countries like ropean partners and involves hundreds of after completing its A-round of financ-
the US were unwilling to allow access to its scientists from 20 countries, preparing to ing last year, it had secured an unspecified
own research. US suspicion of China dates study matter under extreme conditions that amount from Chongqing Two Rivers Avia-
to the work of the Cox Committee, which can be found only in space. tion Industry Investment Group. Weeks
concluded in the 1998 that China “has sto- China also faces significant compe- earlier, the Tianyi Space Research Institute
len or otherwise illegally obtained US mis- tition from rivals in the development of announced that it had raised close to RMB
100 million ($15.3 million) in its own
round of financing.
2016 in Space Flight Another major player is Kuang-Chi
China and the US tied for the most orbital launches Science, led by Liu Ruopeng, the “Elon
Musk of China.” His company is develop-
ing cutting-edge aerospace technology, in-
cluding a balloon-launched capsule called
The Traveler, which aims to take six pas-
sengers as high as 100 kilometers above
earth. It has performed two test launches
since 2015, the second of which safely car-
ried a live turtle.
Even Chinese social media giant Ten-
cent is looking beyond Earth. It is invest-
ing in America’s Moon Express, a startup
that aims to put drones on the moon; Ar-
gentina’s Satellogic, which specializes in
satellite imagery; and America’s Planetary
Resources, which is examining asteroid-
mining.
Source: spaceflight101.com
Chang Guang Satellite Technology,

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Nighttime launch of a Long March-5 Y2 heavy lift rocket

founded two years ago by more than 40 in- of Elon Musk. His SpaceX is leading the building satellites more cheaply, although
stitutional and private investors with tech- way in private rocket launches—including it is not yet clear if China’s private space
nical support from the Chinese Academy deliveries to the International Space Sta- companies are making money.
of Sciences, is one of many micro-satellite tion—and making strides toward reusable
and nano-satellite assembly plants to have rockets and manned missions. To Infinity
emerged. Each has plans to send small sat- With the economic boom of recent de- In space terms, China is still behind West-
ellites into space. Chang Guang aims to cades fading, Beijing recently set its 2017 ern governments and private companies
launch 60 satellites by 2020. national GDP growth target at 6.5%, the like SpaceX, and the future promises more
China’s BeiDou Navigation Satellite lowest in 25 years. Some experts are con- jockeying between rival nations. The in-
System, the country’s answer to GPS, is cerned that funding might slow further as ternational space market looks set to be
another motivation for China’s space re- other priorities compete for attention. dominated by extremely fierce competi-
search. The system, already covering 317 “It may be that Chinese leaders will feel tion as China continues its huge investment
Chinese cities, is eventually intended to that the investments are higher than justi- into space-science, satellite and navigation
cover the globe, especially countries tied fied,” says Dean Cheng. “Alternatively, as technologies. And apart from rivalry over
to the Belt and Road Initiative. By 2020, a means of moving the Chinese economy scientific achievement, China’s space pro-
thirty-five satellites should be operational. up the value chain, fostering advanced gram will continue to cause security jitters
Businesses related to BeiDou are expected technologies and indigenous innovation, between China and other nations.
to be worth $58.1 billion by 2020, said Ran and improving productivity, space may be But, China intends to be a major player
Chengqi from Beidou Navigation Satellite seen as a means of improving Chinese eco- in space and, with a strong and growing do-
System, speaking at a conference in May nomic growth and performance.” mestic talent pipeline, Beijing’s power in
this year. For the time being, China remains a the heavens only seems set to grow. In
But while investors seem optimistic, relatively small player in the satellite indus- twenty years, the world could be watching
China has a long way before its commer- try. But experts say the country could eas- China land its first astronauts on the
cial space industry catches up with the likes ily catch up in numerical terms because it is moon—just as planned.

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Interview

Man and Machine

Brian Christian, author

D
ecades before Siri and Alexa began battling it out for best virtual assistant,

of The Most Human

computer scientist Alan Turing invented the eponymous Turing Test of ma-
chine intelligence. The test goes: if a human operator cannot, after a text con-
Human and Algorithms versation, determine if he is talking to a human or a computer, then the computer is
“intelligent” insofar as the operator is concerned.
to Live By, discusses Today, the Loebner Prize, an annual competition in artificial intelligence, sets a
panel of judges the task of finding via the Turing Test the “Most Human Computer”
the gaps and overlaps and also the “Most Human Human,” or the person the judges least often mistake for a
between humans and computer. In 2009, author Brian Christian entered the competition and later produced
the best-selling book The Most Human Human, which investigates the nature of intel-
machines ligence. His second book, Algorithms to Live By, co-authored with cognitive scientist
Tom Griffiths, was published last year.
In this interview with CKGSB Knowledge, Christian dives into the ideas underly-
By John Christian
ing both books.

Q: You hold degrees in philosophy and computer science. Why did you start with
such a dual track approach and how has that influenced your career?
A: I have always been motivated by curiosity and by the big questions: “What does
it mean to have a mind?”, “What is the nature of intelligence?”, “What is the nature
of reality?” Philosophy gives us a way of framing these questions, but the rigor avail-
able in computer science offers a set of tools and insights that, for me, are also strik-
ingly applicable to that set of questions. There are fertile intersections between the
two areas, which I have explored in my books.
The first, The Most Human Human, investigates the question of intelligence.
What are the hallmarks of intelligent behavior? What is the nature of interperson-
al communication? And, at the broadest level, what have we learned about what it
means to be human by attempting to build machines in our own image? In large part,
that’s the story of what we have learned about ourselves from our failures to replicate
certain aspects of our own intelligence.

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The second book, Algorithms to Live By, in a way takes the

question from the flip side—what do minds and machines have in
common? And what are the things that we can learn from the some-
times unexpected parallels between problems in computer science,
There is a paradox
and problems in our everyday lives?
There is a dialogue between the two books where they almost
ask the same question from two different sides: what do we learn
that as communication
about the differences between humans and machines, and what do
we learn from the similarities. tools become
Q: The first book is a critique of the perception that a certain dehu-
manization results from our constant interactions with and through
machines. But given the pervasiveness of digital culture, how do
more powerful, we
you begin to fight back?
A: There is a paradox that as communication tools become more communicate in ever
powerful, we are communicating with one another in ever lower-
bandwidth forms. In the last century, we went from meeting in per-
son to talking on the phone. We went from talking on the phone
lower-bandwidth forms
to writing emails. Then we went from writing emails to texting.
And now from the text message to the emoji, or to the single-button
“Like.” We have almost reduced human conversation to its logical Q: You make the point in the book that despite computers being ex-
minimum, literally in some cases to a single bit of information. I tremely powerful, there are problems that cannot be solved by brute
think this has a homogenizing effect. force of calculation. To arrive at solutions, you need to introduce
Another example is the Gmail Smart Reply, which includes au- an element of randomness or simplification. How has developing
tomatic suggested replies to messages. If someone proposes a meet- algorithms to tackle these types of tasks helped change our under-
ing, it might offer “sounds good” and “sorry, I can’t make that.” But standing of handling difficult tasks more broadly?
we should be mindful of what we are trading off in that equation of A: One of the most valuable contributions of theoretical computer
efficiency. I think the Turing Test gives us the perfect illustration. science has been complexity theory, which is a way for understand-
In a Turing Test you have nothing except the idiosyncrasies of your ing and ranking how difficult problems are. In broad terms, you
word choice to assert your identity. could say mathematics is about finding the correct answer to a prob-
lem and computer science is about deciding how hard the problem is.
Q: Before we get into talking about the second book, can you de- Computer scientists deal with what are known as “intractable
mystify the term “algorithm”? problems,” or “NP-hard” problems. In this set of problems there
A: The concept of algorithms far predates the computer, and argu- simply is no scalable way to get the exact correct answer every time.
ably predates mathematics, and so one of the goals of the project To address them, computer scientists turn to a toolkit of strategies.
was in fact to re-humanize them. You can think of an algorithm as These include things like settling for approximate solutions, or set-
just a discrete series of steps, a process that you follow to get some- tling for algorithms that are correct only most of the time.
thing done. Any process that you can break down into steps is an One of my favorite examples comes from the world of encryp-
algorithm, including a cooking recipe. tion. If you want secure banking or commerce, the starting point
Computer science gives us a way of recognizing some really is usually generating an enormous random prime number, and that
fundamental things in everyday life. One of the examples the book requires finding efficient ways of determining whether a large ran-
gives is if you are hosting a party, or if you are at a large dinner, dom number is in fact prime. One of the best ways to do this is using
there is a moment where everyone shakes hands with one another the Miller-Rabin test, which happens to be wrong 25% of the time.
in greeting. You might have noticed that when there are more than We asked the developers of Open SSL, an open-source library
a few people there, it takes a noticeably long time for everyone to for secure communications technology, which uses this test, what
make sure that they have shaken everyone else’s hand. they do about that and the answer was they just run the test 40 times,
Computer science gives us a language for identifying what’s go- and accept that the margin of error of 25% to the 40th power is good
ing on here. And so, for example, the number of handshakes that need enough. And this is in banking and even in military applications.
to happen grows with the order of n squared, the square of the number The deeper point is that computer science really gives us a
of guests at the party; computer scientists would call this a quadratic way of thinking in new terms about what it means to be rational.
algorithm. It doesn’t scale well! Part of the real value of computer Behavioral economics has highlighted the idea that people are fal-
science is that it gives us a vocabulary and a rigorous set of tools for lible, they make mistakes, they have cognitive biases and behave
identifying even these everyday things that are around us in life. “irrationally” and so forth. Computer science, I think, offers a bit

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Interview

of a different story: many of the problems that we face in life are

simply hard, that is, computationally intractable. In many real-life
situations we trade off the quality of the answer or decision that we
ultimately get with the pain or the cost of actually thinking about it.
Computer science
Q: Tell us about one such tradeoff situation.
A: A classic one is the explore/exploit tradeoff—how much time
really gives us a way of
do you spend gathering information, and how much time do you
allocate for using the information you’ve got? Computer scientists
refer to this as the “multi-armed bandit” problem, which references
thinking in new terms
the “one-armed bandit,” a nickname for casino slot machines.
It goes like this: in a casino, each slot machine is set to pay out
with some probability, and it is different for each machine. If you
about what it means to
go to play for the afternoon you will want to maximize your return.
This involves some combination of trying different machines out be rational
and some amount of time cranking away on the machine that seems
the best.
For much of the 20th century, the question of what exactly con- answer is surprisingly specific: 37%. The optimal way to pick a can-
stitutes the best strategy was considered unsolvable, but a series of didate is to get through 37% of the available options or of the time
breakthroughs on the problem over the last several decades yielded allotted, and then commit to the next option that is better than all
some exact solutions and broader insights. The details of the opti- previous ones.
mal algorithms are difficult to explain concisely, but the key con- When it comes to something like romance, most people, includ-
sideration is how much time you have. If it is your final moment in ing me, are resistant to the idea of a methodical approach—it’s just
the casino, you should pull the handle of the best machine you know not romantic. But in practice, we are more logical about it than we
about. But if you are going to be in the casino for 80 years, then you realize. If you’re the parent of a teenager and the teenager says,
should spend almost all your time initially just trying things out at “You know, I met this amazing person who is going to a totally
random. different college, so I’m just going to put my life trajectory on hold
These algorithms are now powering huge parts of the digital and follow them across the world…” you would say, “No way!
economy. Google, for example, has an enormous pool of ads that You think this is the relationship you should stake the direction of
they could serve for any particular search query. They could always your life on, but maybe if you just go to your college you will meet
serve the ad that got the most clicks historically, but on the other someone else.” But if someone at 35 says the same thing, “I met this
hand they have a lot of ads that they have never served that they incredible person, and I am going to move across the world,” one
need more information for. The algorithm optimizes the process. is more inclined to say, “Go for it! You know what you’re looking
In more personal terms, I also feel like this is an idea that helps for at this point.”
us makes sense of the arc of a human lifespan—why children seem This is anecdotal, but I think it is interesting that 37% of the av-
so random and older people seem so set in their ways. Well, in fact erage life expectancy in the first world is about 28-29 years old, and
they are both behaving optimally, with respect to how long they the average age of someone at their wedding is also 28-29 years old.
have in life’s casino. There is sort of a funny sense in which these principles may offer us
a macro-level understanding of societal norms and patterns, even if
Q: Might thinking about life in terms of algorithms take some of we are reluctant to apply them at the individual level.
the magic out of it? For example, there seems to be a qualitative
difference between “trying to find the optimum romantic partner” Q: What will you work on next?
and “falling in love.” A: I am working on a book that is about the intersection of com-
A: In many areas of life there is a mixture of an intuitive, emotional, puter science and ethics. I think that’s the next big thing. As we
ineffable process and a more deliberate, intentional, rational pro- were discussing, I think we are at a point where philosophy and
cess. Buying a house is one example of the two working together. computer science are very much in dialogue with one another and
Sometimes you walk into a house and something doesn’t feel this to me seems like the next wave that’s breaking. We are increas-
right, and you may not ever be able to articulate why. Or on the oth- ingly deploying automated systems to make consequential, moral
er hand, you might feel good as soon as you set eyes on it. Nobody judgments, like who gets parole. There is this question of how do
can tell you what is good, or what isn’t—but there is an algorithm we ensure that the systems we are entrusting such decisions to actu-
that can help you with the more rational part of the equation, which ally uphold our sense of human and civic values. There is a fascinat-
is whether to settle for something good or hold out for something ing conversation that is just beginning to happen, and that is what I
even better. This is called an “optimal stopping problem,” and the am researching right now.

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New Cars in a New Economy

China’s two speed car market
By Shasha Chen
Image by Beibei Nie

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Innovation

Like its whole

E
ric Zhang recently turned electric. becoming the norm and sales increasingly
That is, the 29-year-old marketing skew towards new-energy vehicles and cars
economy, professional from Beijing recently
bought a BYD E5, an all-electric sedan
with high-tech functionality, such as self-
driving capabilities.
China’s auto made by Shenzhen’s BYD Auto. He is one
of three people in his immediate circle of
In the first half of this year, sales of
passenger cars totaled 11.25 million, up by
market grew at friends to buy a new-energy vehicle (NEV)
this year.
only 1.61% from the same period last year.
This is a significant downshift for an indus-
breakneck pace Zhang says they all made the choice
based on a practical consideration of li-
try that has been a world-beating growth
machine for decades. China’s modern auto-
in the 2000s, and cense registration and cost. Beijing is one
of eight Chinese cities that have restricted
mobile industry started in the 1980s, when
foreign manufacturers like Volkswagen en-
while it is now the number of conventional vehicles on the
roads. In 2011, the city introduced an an-
tered China to set up joint-ventures. Later,
local producers like Geely Auto and Great
slowing down, nual public lottery to decide who would be
eligible to register new internal combustion
Wall Motors were founded. In 1985, the
infant industry produced 5,200 vehicles.
it still contains engine cars.
“The chances of winning are lower that
Growth remained low until 2001, when
China joined the World Trade Organiza-
enormous 0.2% in Beijing, which means many of us,
even if we enter the lottery repeatedly, will
tion, and then the market boomed.
The growth rate of passenger car sales
potential in terms die before we get a license,” says Zhang.
NEV licenses are not won through a lottery,
surpassed 56% in 2002, and maintained
double-digit growth for years afterwards.
of both raw sales but simply bought after standing in a queue.
Influenced by the push-and-pull of gov-
In 2009, China overtook the US to become
the world’s largest car market, with sales
and innovation ernment policies, car buyers like Zhang are
transforming China’s auto market. China’s
surging 46% year-on-year to hit 13.6 mil-
lion vehicles.
as China shifts NEV sales volume surged from 8,000 units
in 2011 to 507,000 in 2016, according to
“Several of my colleagues and I pur-
chased our first vehicles in 2001 and 2002,
toward electric the China Association of Automobile Man-
ufacturers (CAAM). It is a sharp contrast to
and we received generous car allowances
from our employer,” recalls Mingxin Zhao,
the slowing growth of overall automobile who works for a government-owned com-
sales in China. pany in Beijing.
“NEVs are increasingly an option due to Mirroring an overall slowdown in the
government incentives,” says Stanley Yan, economy, the car market has since grown
Senior Analyst with Franklin Templeton Si- sluggish. In 2015, annual growth of car
noAm Securities. China provides subsides sales was just 4.7%, according to CAAM.
that amount to about 23% of the price of a The government reacted by introducing
vehicle. That’s lower than some Scandina- nationwide tax incentives in 2016, which
vian counties, for example Denmark’s 29% resulted in a 13.7% year-on-year surge
subsidy, but higher the US’s 18%. with 28 million cars sold. But according
Although the NEV market is on a steep to Russo, the tax incentive merely caused
upward trajectory, it is also beset by prob- consumers to move up planned purchas-
lems in terms of both developing technol- es—and indeed, this year the impact has
ogy, and in the creation of a marketplace faded with auto sales posting year-on-year
that can succeed in the in absence of state decreases in both April and May.
support. Consumer attitudes towards cars are
also changing. In a 2016 survey of 3,500
Cruise Control Chinese consumers by McKinsey, about
“China’s automobile market is matur- half of respondents indicated that car own-
ing,” says Bill Russo, the Shanghai-based ership is no longer a status symbol. Howev-
Managing Director of Gao Feng Advisory er, the number of consumers who say they
Company, a strategy and management con- are interested in buying an NEV has tripled
sulting company. He says slower growth is since 2011.

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 Fall 2017

For consumers in first-tier cities, pur-

chasing a new car is only one of several Cruise Control
options open to them. “Alternatives like By 2030, China’s market size for “light vehicles” could be 33 million
buying a used car, leasing or renting, and China’s
relying on e-hailing and car-sharing servic- current
es hold increasing appeal,” said the McK- 23m
insey report. Rental and sharing services annual
could reduce annual vehicle sales by 10% sales is
by 2030, McKinsey predicts. 29% of
Russo echoed McKinsey’s findings. In global The market forecast for
addition to the disruptive forces identified sales 2030 is 33m sales,
by McKinsey, he says, “Hardware innova- 30% of global sales
tions, such as autonomous driving technol-
ogy, will be commercialized through the
development of on-demand mobility ser-
vices and the larger digital ecosystems.”
Source: KPMG

Bumpy Ride
Central to the changes outlined by Russo Warren Buffett has a stake, to become the in 2019, which will require all large auto-
and McKinsey is the push for new-energy world’s largest electric car and bus maker. mobile manufacturers to produce NEVs
vehicles. But despite the excitement and But the carrot-and-stick strategy has (10% of their output in 2019 and 12% in
solid growth numbers so far, there are chal- some issues. “The approach has stimulated 2020). Those who fail to meet the targets
lenges ahead. the NEV market, but also created negative will face financial penalties, including po-
Even as an owner of a new NEV, Eric developments in a few cases, such as fraud- tentially losing their license to sell tradi-
Zhang still has doubts about their overall ulent behavior among some manufacturers tional cars in China.
competitiveness against petrol-driven ve- for subsidies,” says Hoi Tran, Partner and The quotas talk triggered instant part-
hicles—not the cars themselves, but the China Head of Automotive, KPMG China. nerships between foreign giants and local
charging stations. “The lack of power sta- The low-end NEV power battery sector NEV producers. Examples include Volk-
tions means we rent a gas-powered car for is expected to enter overcapacity status in swagen’s JV with Anhui Jianghuai Auto-
long weekend trips,” Zhang says. 2018, with fragmented manufacturing and mobile Group, which was announced this
The government is working to address insufficient innovation, said Zhang Junyi, May, while Ford Motor’s JV and Anhui
this as part of the electric vehicle push. In a partner with Nio Capital, an investment Zotye Auto sealed a tie-up this August for
the “Made in China 2025” initiative un- firm co-established by electric vehicle com- NEV production. Both Jianghuai and Zotye
veiled in 2015, the NEV sector was listed pany NextEV, Sequoia Capital and Hill- are among the top ten NEV manufacturers
as a prioritized industry and plans were house Capital. “Meanwhile, the production in China.
included to subsidize charging stations. At of high-end power batteries for premium The medium-term goal of the govern-
the end of 2016, the State Council also an- electric cars still lags demand, and the core ment is to have five million NEVs on Chi-
nounced that it would tighten planning reg- NEV technology trails behind global com- na’s roads by 2020, but some see this as un-
ulations for new factories that plan to build petitors,” Zhang says. realistic. “Once China reduces subsidies to
traditional vehicles with internal combus- To tackle the problems, four govern- NEV manufacturers and consumers, NEV
tion engines. The thinking being that stimu- ment ministries announced in January this growth will be challenged,” concludes
lating electric vehicle production should year that subsidies for NEVs will decline Stanley Yan.
stimulate charging station construction. by 20% from 2016 levels. The Chinese
“The NEV industry has strategic impor- government is also seeking to acquire ad- Promise Remains
tance for China, not only for the automo- vanced foreign technology through regula- China, as the world’s most populous coun-
bile industry to compete globally, but also tory changes. try, still offers opportunities to both domes-
for pollution control and energy indepen- In January 2017, the Ministry of Indus- tic and international auto manufacturers.
dence,” says Stanley Yan. try and Information Technology (MIIT) is- “China will be the dominant marketplace in
Since 2012, the Chinese government sued a market-entry requirement for NEVs, terms of market size, innovation and con-
has spent billions subsidizing local elec- which forces manufacturers (including sumer behaviors in the future,” says Hoi
tric car and battery makers. Most notably, joint ventures) to disclose details of the Tran. He expects lower-tier cities will expe-
its support has been critical in helping the technology used in development. MIIT is rience double-digit growth in coming years.
Shenzhen-based automaker BYD, in which also expected to introduce a quota system In KPMG’s Global Automotive Execu-

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Innovation

tive Survey 2017, global executives also a vehicle type gaining popularity across viewed as a necessary path for Chinese au-
see China’s future as bright. China aims the board. China’s SUV sales totaled 4.53 tomobile makers to grow from being big to
to have 70% of its population—some one million in the first half of 2017, up 16.83% being strong.
billion people—living in cities by 2030, up year-on-year, making it the only growth The lower cost of Chinese automobiles
from less than 60% at present. This increas- segment among passenger cars. gives China an edge in African, Southwest
ing urbanization is expected to provide Overall, the future remains bright. Ac- Asian and Latin American markets. But
abundant market opportunities. cording to the KPMG survey, 75% of ex- the development plan issued by MIIT and
The KPMG report also highlighted the ecutives believed that the global share of several other ministries this April has set
openness of Chinese consumers to try new vehicles sold in China will be above 40% a challenging goal of selling Chinese cars
things. Executives rated China over Ger- by 2030, or 43 million cars annually. But into developed markets by 2020—though
many and America in terms of consumers’ China’s vehicle-to-population ratio (cur- Toyota eventually became a hit in the US,
adoption of new and disruptive products rently 106 vehicles per 1,000 people) is it failed hard when it first entered the mar-
and mobility services. unlikely ever to reach the US level of 800 ket in the 1950s.
“Chinese consumers are a major force per 1,000. In recent years, Chinese car compa-
for innovation as they are open to new tech- In a nation infamous for miles-long nies have tried opening research opera-
nologies,” says Hoi Tran. “Given the high traffic jams, that may not be a bad thing af- tions in advanced markets to attract top
penetration rate of mobile devices and the ter all. But, cautions Russo, “China is still technicians and technology. One example
adaptation to e-commerce, mobile banking likely to approach Taiwan’s current level of is Great Wall Motors, which has built two
and social media, technologies have be- 280 vehicles per 1,000 in the next 10 years.” technology centers in America for research
into innovation in automobile components.
The company’s exports surged by 154% to
17,100 units in the first half of this year, but
[New-energy vehicles] are exports still accounted for only 2.64% of
total revenues.
increasingly an option due to Independent innovation in the Chi-
government incentives nese automobile field, a stated target of the
“Made in China 2025” initiative, remains
weak and manufacturers are dependent on
Stanley Yan key foreign technology and equipment. But
Zhang Junyi believes that gaining a head-
Senior Analyst start in the development of NEVs would
create new opportunities for China in in-
Franklin Templeton SinoAm Securities ternational markets, particularly with the
Trump administration apparently backing
away from supporting such technologies.
come an integral part of the everyday life of New Frontiers More mergers and acquisitions and
a Chinese consumer.” The desire of Chinese domestic automak- overseas expansion are expected in the
This phenomenon will drive innovation ers is to go global, but exports accounted NEV sector, according to analysts. Just this
in China’s automotive industry, including for less than 5% of automobile output in year, Chinese battery giant CATL acquired
NEVs, in the form of connected cars that the past five years. “Chinese manufacturers a 22% share in Finnish car manufacturer
integrate with wireless networks, and self- still need to improve international competi- Valmet Automotive, while BYD set up a
driving cars. Last year, the Shanghai state- tiveness, especially in developed markets, production facility in California, employ-
owned car-maker SAIC launched its first but there will be a growing trend for Chi- ing 700 people.
“Internet car,” the Roewe RX5, with e-com- nese car makers to venture internationally,” Despite the limited presence of Chinese
merce operator Alibaba. This connected ve- predicts Zhang Junyi. This includes build- automobiles internationally, future oppor-
hicle integrates into the “Internet of Things,” ing factories abroad and expanding sales tunities loom large. Currently, China is al-
connecting to both the web and other devic- into more markets. ready the world’s largest passenger car
es. The model sold more than 90,000 units in Several automobile brands including manufacturer, as well as the top NEV ex-
2016 after hitting the market in July, becom- Geely, BYD, Jianghuai Automobile, BAIC porter. With China’s production chain be-
ing the most popular new nameplate among and SAIC, have built factories overseas, ac- ginning to expand globally, “the world is
93 models launched in China last year. cording to the CAAM. In August this year, likely to be driving far more cars from Chi-
The popularity of the RX5 may have Xu Haidong, secretary-general of CAAM, na in the near future,” summarizes Stanley
been helped by the fact that it is an SUV, said the international expansion has been Yan.

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 Fall 2017

Innovation from
the Inside Out

Kapil Kane, Director

H
ow do big multinational companies innovate? According to Kapil Kane, Direc-
tor of Innovation at Intel China, there are three ways: partnership, acquisition
of Innovation at Intel and in-house development. The problem with the last of these is that in-house

China, describes how his R&D laboratories may be good at invention but not at innovation—that is, finding
new uses for, or making improvements to, existing products and processes. Kane
Ideas2Reality program aims to fix this with his Ideas2Reality (I2R) program at Intel China.
I2R is a startup program nested inside Intel’s China operation. It encourages em-
uses human resources ployees to submit ideas, which are vetted, incubated and accelerated using the same

already at hand to search principles used by leading Silicon Valley accelerators, such as Y Combinator, with
the aim of producing viable business applications. By looking inside the company,
for the ‘Next Big Thing’ Intel is leveraging the talent and knowledge of its engineering staff by training them
to think like entrepreneurs—and by this standard, it is as much focused on people as
it is on technology.
By Tom Nunlist Kane holds a master’s degree in Mechanical Engineering from Stanford Univer-
sity. Early in his career, he played an important role in developing Apple’s first touch-
screen products, and later moved to China to oversee aspects of the manufacturing of
MacBook computers. He has been living and working in China for 10 years, mostly
in Shanghai.

Q: Before heading the innovation program at Intel China, you were at Apple. What
did you work on there?
A: After working at my first job out of college, designing cars at Johnson Controls,
I enrolled in a Ph.D. program at Stanford, studying product design and engineering.
While there, I interned at Apple one summer. Although I was not fully aware of it at
the time, because of the extreme secrecy, I, along with couple other engineers, ended
up creating the first-ever multi-touch screen that went on to find its way into the very
first iPhone that Apple released.

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Interview

Q: Amazing! What was your role? The program is called Ideas2Reality, or I2R, and there are two
A: We were just kids! Our mentor was the real brain behind the phases: incubation and acceleration. The incubation phase hap-
project, I was the mechanical guy and the third guy was in reliabil- pens year-round. Anyone at Intel can submit an idea to our online
ity, so his job was to try to break everything that I designed. As I platform. Along with the idea there are a few simple questions to
said, we had no clue about the iPhone, but we were toying with this answer: what resources are needed to bring that idea forward, and
idea of having a big screen that you could interact with by touching what will be delivered at the end of the day if those resources are
with all 10 fingers—our first version actually resembled something granted. Then every month a committee of experts in various fields
more like the iPad. And the killer app was the map: you could zoom, gets together, goes through the ideas, and determines which ones
you could rotate and twist using your fingers. are worthy of seed investment, almost like an angel investor. From
The whole thing was so much more exciting than what I was there, we provide some resources, access to mentors, interns and a
doing in graduate school. I really pleaded with my professor and bit of money to develop the idea.
said, “Please let me go.” Luckily, I had enough credits to get a mas- This keeps the workforce engaged on things that matter to them.
ter’s degree, so I was able to graduate. However, I would say my It keeps them motivated and happy. In return, we get a huge bag of
real education happened at work. “Design thinking,” “being human- cool new technologies.
centered,” all these hot terms that you read about now, I learned all Then comes the second part: acceleration. Now that we have
that on the job and from really amazing people. all these technologies, we try to turn them into viable businesses.
Innovation is about creating value, not about creating demos—you
Q: What brought you to China? have to build something that customers are willing to pay for. Twice
A: It was the first MacBook Air, which was, at that time, the thin- a year, we select a batch of five to seven projects for the acceleration
nest computer ever created. In fact, it was so thin that the only way program that lasts six months.
to make it was to carve the body out of a solid block of aluminum— The inspiration came from the famed Silicon Valley accel-
what this meant was that we had to design the process to design the erator Y Combinator and SOSV’s (Sean O’Sullivan Ventures)
product. To accomplish that, we decided to move a few people from China Accelerator right here in Shanghai. We start with a busi-
Cupertino to China, and I signed up for the challenge. ness model canvas: their key assumptions, their partners, revenue
The main reason for this was that when we designed compo- stream and so on. The thing is, 99% of people in this program
nents and sent the specifications to the Chinese manufacturers, they are engineers—they have no idea about business concepts, and
would come back and give 10 reasons why they can’t do it. Then that’s where we have to start. We introduce them to the concept of
we’d have to change the design and this wasted a lot of time. But if minimum-viable product (MVP). Their goal is to deliver an MVP
we were here, right on the factory floor, seeing how it’s made, we and a validated business case in six months. These we bring back
could quickly tweak the design or challenge them about the manu- to Intel management.
facturing process. That’s why I came to China about 10 years ago.

Q: And then you moved to Intel?

A: I moved to Intel about five years ago, at first to create a tablet com-
puter for underprivileged children—it was an evolution of the “One
We are engaging
Laptop per Child Program” started by MIT’s Nicolas Negroponte.
Our challenge was to create a tablet that would be cheap enough and
rugged enough to become the next version of this classic program.
the mindset of our
Eventually I ended up working on a holistic solution for educa-
tion in places with low internet infrastructure called Education Con-
tent Access Point. It’s like a Wi-Fi access point, but you can carry
innovators so that
it with you. Teachers in remote areas can simply put it in their bags
and take it to the class. They have everything they need without
having to be connected to the internet.
they can talk about
Q: And how did the innovation program within Intel get started? their ideas in a way
A: Intel operates out of more than 10 sites in China. Some of these
sites had a policy similar to Google—employees were given time to
pursue their own creative projects. We had some small successes,
that makes sense to
but the president of Intel China thought we might do better by unit-
ing these efforts. The thinking was that if we could do this innova-
tion in a more systematic way, we could actually make an impact.
business leaders
My position was created about two and a half years ago.

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 Fall 2017

Ideas2Reality has produced numerous technologies, such as the Home Care Robot, pictured here with its co-inventor Cao Lu (left)

Q: So you are teaching them to be business people and marketers, about 70. When it comes to acceleration, in our first three completed
in addition to engineers. batches, we have accelerated about 20 projects. Right now, we are
A: Right, we are engaging the mindset of our innovators so that working on the fourth batch, which has seven projects.
they can actually talk about the ideas in a way that makes sense to As for administration, we have just two full-time headcounts
business leaders. Usually if you ask engineers to explain their ideas, dedicated to this program—it’s me and another employee. But we
they start getting into technical details. We don’t want to hear any also get help from a bunch of part-time volunteers from various
of that. Tell us why the idea matters. What is the problem you are business functions like finance, HR, employee communications, le-
trying to solve? How big is that problem and why do you believe gal and venture capital. Super lean—that’s how we have managed
you are the right person to solve the problem? to survive various downturns in the recent past.
They also need to be taught how to deliver a good pitch in five
minutes. Many engineers are uncomfortable talking to anyone out- Q: Can you give an example of a successful project?
side of their group, so we challenge them to get out of Intel and talk A: We had a really interesting project that came from Li Weigang,
to people. We actually require them to spend one day per week in a guy in the Network Processing Group. He had created a software
a startup accelerator. We recently launched a program called I2R program to make data encryption and decryption run faster on Intel
StartupX in partnership with XNode, a co-working space and a hardware. What he noticed was that, with a few tweaks, he could
startup accelerator in Shanghai just to do that. They talk to other re-purpose the same code to compress large amounts of data in very
startups there, they talk to would-be customers and potential part- little time—specifically, the kind of data created during human gene
ners, right there in that setting and not in the comfort of their offices. sequencing. The only problem was that it was not his group’s re-
At the end of this acceleration, we have solid business logic to bring sponsibility.
back to the business units. He came to us and we not only helped him develop the tech-
nology, but also connected him with some of the world’s largest
Q: What is the scale of the program in terms of people involved and genome sequencing companies, BGI and Novogene (see article on
resources devoted? page 54). They simply loved what he had created. It solved a major
A: Intel China has about 7,000 employees and this program is for pain point for them. With the customer already loving it, we were
them. Since the program began, we have had 350 ideas come in— able to convince the right business group to make it a part of their
one every couple of days. Out of these 350, we have incubated next release. In June this year, it became an official Intel product.

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Interview

someone will ask to become the GM (general manager) of a group

that they helped create, and that would be a great problem to have!
We are changing Q: What are your other internal goals with this project?
A: There is no other program like this at Intel. Although there is
the mindset of our a group at Intel in India called Ideas2Reality, they are far from a
program like ours. They start with ideas that originate from brain-

workforce. These storming in small groups and have the team and resources within
the group to develop them further. What I want to do is bring our
bottom-up approach to innovation to other corporate locations and

“intrapreneurs” we eventually to our headquarters.

I believe what we have found here is a good model that is simi-
lar to what startups are doing right now. If you look at the startup

create [will] give us the ecosystem, there are incubators, there are accelerators and there is
seed funding. We are mirroring all that, but within the company.
The other focus for us is people. Yes, we are creating projects
next big thing and new businesses. But, more importantly, we are changing the
mindset of our workforce. We are turning our innovators into “in-
trapreneurs,” that is entrepreneurs inside of a large organization.
That’s what I say is the true value of our program. These “intra-
Q: Only someone deep in the weeds could spot a need like that? preneurs” we create are the ones who are going to give us the next
A: Exactly, such ideas are born out of real people doing real things big thing.
in their day-to-day jobs where they connect the dots. Decision mak-
ers in the business units sitting in the US wouldn’t necessarily know Q: In other words, you are trying to change the corporate mindset?
of customer pain points in China, or how large that opportunity A: Before we get into that, I’d like to clarify one thing. People often
might be. confuse innovation with invention. Invention is creating something
This is exactly why our program exists. Engineers that see these new that did not exist before while innovation is finding new ways
problems don’t have the communication channels to reach the deci- of using existing things to create value for the customers and bring
sion makers. Then, more importantly, they don’t have a customer, in revenue for the company. Touch screens, cellular communica-
but the reason they don’t have a customer is because they don’t tion and internet browsing are great examples of inventions that ex-
have the resources to develop a solution. In other words, it can be a isted before the iPhone came along. Apple merely packaged them
very chicken-and-egg problem. Our Ideas2Reality program solves together and that won the hearts and minds of consumers around the
that problem. world. That’s innovation!
Now there are essentially three ways to innovate as a big com-
Q: In the more traditional startup model, the founders would get a pany. You can partner with an outside company, you can do an ac-
stake in the company. How are your employees rewarded? quisition outright or you can create innovations on your own. Tra-
A: Ideally, founders should get a stake in the business that he or ditionally creation has been the job of the lab, the R&D center, but
she has created, but we are still in the early days and we have not R&D centers do not necessarily innovate, they invent things.
yet had a blockbuster success. Without a big bang success story, it The question I see then is, if you can partner with outside com-
is hard for me to go to my higher-ups at Intel and say, “Hey, you panies, why are you not willing to partner with your own employ-
need to change the compensation model.” However, at this point ees? Look inside and see what you have! There is one remark that
our employees are super happy to be recognized. We have this our Intel China president made that I quite like: there is a willing-
Wall of Fame at all sites featuring our innovators. We also feature ness to back a couple of guys dropping out of school and creating
them in posts on our official WeChat account. Another great moti- a startup, and that is great. But what about guys coming from a
vator is that they get to go and network with the top leaders of our Fortune 500 company, or a Fortune 50 company, who have been in
company not only in China, but also worldwide. the business of technology for 10 years? When they come up with
We also tried twice to encourage our employees to leave an idea, what is stopping you from backing them?
Intel and start their own companies, but both times we did not
succeed. In the first instance, the guy got cold feet, which goes Q: Yes, what is stopping a company from backing them?
to show that taking risks is not for everybody. Some people are A: I think it’s just human nature. We tend to listen to people far from
happy with a corporate job, but one that still allows them to do us, the so-called “experts,” rather than those who are close to us, our
cool things. own employees. But, at Ideas2Reality we are striving hard to change
Compensation is something I think about a lot. Eventually that.

28 / CKGSB Knowledge 2017

• Build an international
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Economy & Finance

Piece by Piece
SOE reform is among China’s biggest challenges
By Tom Nunlist
Image by Wei Bingnan

30 / CKGSB Knowledge 2017

 Fall 2017

CKGSB Knowledge 2017

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Economy & Finance

For the past

B
eijing is making yet another attempt ly-owned companies, including Alibaba,
to reform its bloated array of state- Baidu and Tencent, purchased 35% of the
few years, owned enterprises (SOEs). Employ-
ing millions of people across all sectors,
shares in China United Network Commu-
nications for RMB 77.9 billion ($11.7 bil-
China has been the estimated 150,000 SOEs dominate key
Chinese industries making everything from
lion). Listed in Shanghai, the company is
part of state-owned China Unicom, China’s
pursuing a new silk to steel to spacecraft.
Yet, for all their size, they only provide
second largest telecom operator.
Beijing heralded the deal as a milestone
and ambitious 16% of jobs, less than a third of national
economic output, and a return on assets of
in “mixed-ownership reform.” Many com-
mentators, however, think that rather than
state-owned only 2.9%. Hugely inefficient, debt-ridden
and responsible for most of China’s bal-
freeing Unicom to act more efficiently, it is
an example of the private sector subsidizing
enterprise (SOE) looning corporate debt, SOEs are a drag on
an economy that Beijing wants to transition
an SOE.
“SOEs are arms of the Party,” says An-
reform program, from investment and export-driven to ser-
vices and consumption-driven.
drew Batson, Director of China Research
for Gavekal Dragonomics, an economic re-
but unlike past The latest reforms aim to reduce the
numbers of SOEs, through bankruptcies,
search firm. “They have a special mission in
addition to the ordinary corporate mission.”
efforts, this one debt restructuring and mega-mergers, and
improve their international competitive-
Ten years ago, China was moving away
from that vision of SOEs, but Batson says
is not about ness. Anyone assuming that this involves
privatization, however, will be disappoint-
now the emphasis is on creating a concen-
trated, efficient and powerful state sector.
privatization, ed.
“Many interpret [these reforms] as a
China has tackled SOE reforms in fits
and starts, so it is unclear why these re-
but just the kind of privatization, but they are not,”
says Gao Song, Co-CEO and Head of
forms will succeed when previous attempts
to reign in SOEs have failed. And even if
opposite—SOE Research at PRC Macro, a Beijing-based
economic forecasting firm. “This will be
SOEs are forged into effective tools of state
economic and policy influence, it may im-
growth and the Chinese model—state-capitalism with
Chinese characteristics.”
pede the private economy, which state-run
Xinhua News Agency says accounts for
strengthening An example occurred last August when
a mix of Chinese state-owned and private-
more than 60% of GDP growth and over
80% of jobs.

Comeback Corporations
The SOE share of fixed-asset investment is on the rise again
China, state-owned firms’ share of fixed-asset investment
(13-month centered moving average)

Source: CEIC, The Economist

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End of an Era? SASAC owns, directly or indirectly, SAC, Xiao Yaqing, wrote in the Central
State-owned enterprises formed after the and regulates all SOEs. It directly oversees Party School’s Study Times that Commu-
founding of The People’s Republic of “strategically important” SOEs, including nist Party members at SOEs are the “the
China in 1949, when the state seized con- companies such as China Unicom, Sinopec most solid and reliable class foundation”
trol of all businesses. Until the 1980s, they and other giant oil and gas firms, as well as for the Communist Party to rule. Of the 40
dominated the economy accounting for companies in coal, electricity, key airlines, million or so SOE employees in China, 10
90% of industrial output in 1978. From the railways, and mining. million are Party members.
1980s onwards, gradual reforms were initi- “During the period under Zhu Rongji, However, such rhetoric only under-
ated, but SOEs remained highly inefficient, there was an emphasis on SOEs becom- lines the role of SOEs as policy vehicles.
largely because their goals have little to do ing ‘normal companies’,” says Batson. In the wake of the 2008 Global Financial
with profit. The idea was that state-owned enterprises Crisis, the Chinese government unleashed
“SOEs perform both commercial and would operate like other enterprises, except a program of stimulus, including injecting
policy roles—even those in fully competi- that they were owned by the state. That ap- funds largely via SOEs. Shortly afterwards,
tive sectors,” says Ying Wang, Senior Di- proach has dramatically changed. China’s economy began slowing and the
rector and Head of the China Research Ini- response was further spending. Much of
tiative at Fitch Ratings in Shanghai. “For Debt to Society this money went into infrastructure, a field
example, a local steel plant is not just a steel “Since about 2012, the SOE share of the where SOEs dominate.
plant. It may supply power for the local re- economy has stopped declining,” says Bat- While stimulus spending helped keep
gion. It may even have schools and hospi- son. He notes, however, that there is debate the economy ticking over, it also created a
tals affiliated with it.” about that size of that share. Batson’s pre- mountain of debt, which the International
By the mid-1990s, two-thirds of all ferred metric is the SOE share of fixed-as- Monetary Fund (IMF) put at 235% of
SOEs were in debt and the Chinese banks set investment, which hovered around 32% GDP in 2016. This poses a serious threat
that lent them money were saddled with from 2013-14, and since 2015 has gradu- to China’s economic stability. Speaking at
billions of dollars in non-performing loans. ally risen back to around 36%. the National Financial Work Conference
This prompted a deep, painful reconstruc- “It may seem like a small change, but in July this year, President Xi Jinping said
tion of the SOEs, led by Premier Zhu compounded over time it is having a big that the SOE debt problem is “the priority
Rongji, lasting from 1997 to 2003. impact on the structure of the Chinese of priorities.”
Thousands of SOEs were merged or economy,” says Batson. He estimates that,
sold, leading to the layoffs of tens of millions had the previous declining trend continued, Reformation
of workers (there are various credible esti- the SOE share of fixed-asset investment to- SOE debt is central to the reforms taking
mates on the exact numbers). There was ex- day would be 10-15%, instead of 35%. The place. The current effort began at the Third
perimentation with privatization, and larger total SOE share of GDP would be 5%. Plenum of the 18th Central Committee in
SOEs were listed on foreign stock exchang- “There is increasing emphasis in offi- 2013, which outlined an ambitious plan to
es, for example, China Mobile on the New cial documents and rhetoric on the role of overhaul the economy, including introduc-
York Stock Exchange. Those reforms also SOEs as servants of the Party and govern- ing market forces to make SOEs more com-
saw the creation of the State-owned Assets ment policy,” explains Batson, indicating petitive. The first phase of reforms amounts
Supervision and Administration Commis- why the trend has changed. to a tabulation of “who owns what.”
sion of the State Council, or SASAC In June this year, the Director of SA- “Even now, a lot of SOEs don’t have a
balance sheet,” says Gao. “There are SOEs
controlled by different government min-
istries and no one knows what the assets
SOEs are arms of the Party. are… And nobody knows who is respon-
sible for the debts of SOEs.”
They have a special mission in addition The end of 2017 is the deadline for
to the ordinary corporate mission this during which SOEs will also become
corporations. In July, the government an-
nounced this was about 90% complete.
Andrew Batson Gao says that China will “definitely meet
that deadline,” but cautions against placing
Director of China Research too much significance on the listing of ac-
counts.
Gavekal Dragonomics However, other substantial reform
moves are underway. In September 2016,

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Economy & Finance

Guangxi Nonferrous Metals Group de- This occurred last year when Baoshan says Ying. Larger scales have not trans-
clared bankruptcy with RMB 14.5 billion Iron and Steel Group combined with the lated into better firms. “We haven’t really
($2.2 billion) in debt, or a debt-to-asset ratio smaller Wuhan Iron and Steel to form seen significant improvements in efficiency
216.8%. Although SOE bond defaults are Baowu Steel, now China’s largest steel pro- coming from the mergers,” she says. Ying
increasingly common, South China Morn- ducer. This merger was about the stronger notes that recent SOE performance gains
ing Post reported that the Guangxi group firm using its balance sheet to support the are due to a broad rally in commodities
was the first entity to go into liquidation. weaker. Similar mergers involve vertical rather than an increase in efficiency and
Some commentators see this as evi- integration, for example merging coal com- productivity.
dence that regulators are prepared to crack panies with power companies to enhance
the whip to get SOEs into shape, especially the cost position. Mixed Ownership,
as Fitch Ratings predicts both Chinese To outward appearance at least, some State Control
state and private company insolvencies are mergers aim to create more globally com- By design, the changes are concentrating
on track for another big increase in 2017. petitive companies. The banner case for this state economic power in upstream indus-
In 2016, they rose to 5,665 from 3,684 in was the merger of China CNR Corporation tries. Their size and position in the econo-
2015. However, bankruptcies are still com- and CSR Corporation to form CRRC, now my reinforces their role as policy tools—es-
paratively rare (the US had four times as the world’s largest train manufacturer. Pre- pecially in the event of another crisis.
many in 2016) and up to August, only 12% viously, the two were engaged in an export “It makes perfect sense that the govern-
involved state-sector enterprises. price war. ment would try to maintain control over the
A more important trend is mega-merg- “The idea is to create national champi- central SOEs,” says Gao Song. “Economi-
ers. According to Chinese state media re- ons,” says Ying. “Now that the price war cally they are a powerful, effective counter-
ports from 2015, the 102 SOEs at the top is no longer there, the company can really cyclical policy tool.”
level of SASAC control will be reduced to leverage its technological expertise.” SOEs tend not to operate in the down-
around 40. Significant mergers are seeing Yet, for all the fanfare, the area where stream economy, where the most value
stronger SOEs absorbing smaller, weaker the SOE mergers have had the most pro- and innovation are being created today. In
players. found impact has been on company credit, the middle, according to the government’s
plan, the giant SOEs will integrate with the
private economy mainly through “mixed
State of Indebtedness ownership” reform. This is at the heart of
Chinese firms’ liabilities as a percentage of equity what Gao sees as China’s new state-capi-
talist model.
The mixed ownership plan will see
China’s large SOEs sell significant minor-
ity stakes to large private companies and
other SOEs. This will bring in fresh capital,
fresh ideas, innovation and, most crucially,
increased efficiency into the infamously
fusty, slow-moving state sector.
But why would private Chinese firms
buy big minority stakes in SOEs? “To
pledge political loyalty,” says Gao. If you
are a private Chinese firm, “you know most
of your business is in China.”
The second reason is that the SOEs
have for a long time consumed economic
resources, particularly credit from the
banking system. Access to credit has there-
fore always been a challenge for private
companies and with the state-centric direc-
tion of the reforms, it seems set to remain
that way. Tie-ins with state firms is a way
around this problem.
“Resources are skewed toward SOEs,”
Source: Wind Info
says Ying. “So, if you are affiliated with an

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Bao Steel and Wuhan Iron and Steel merged to become giant Baowu

SOE, you probably enjoy some benefits in institutional investors to help the corporate he says. “But maybe ten years later we will
terms of financial resources and market re- governance of these companies,” he says. see SOEs grow into another type of mon-
sources.” “That completely failed to happen.” ster again.”
Finally, as oligopolies, some SOEs Howie believes that the real game- Andrew Batson of Gavekal Dragonom-
do generate significant profit, so it makes changing reform would be to allow foreign ics is a bit more skeptical. Economically, he
business sense to buy into assets paying companies to buy majority stakes in Chi- sees evidence that SOEs are crowding out
dividends. “When private firms make these nese state companies, or allow China’s own private sector investment, which is contrib-
investments, most are still driven by com- entrepreneurs to compete in protected sec- uting to the gradual decline in the growth
mercial motives,” says Ying. tors. “Let Alibaba set up its own [telecom] potential of the economy overall. Batson
But there is an inherent contradiction network,” he says. also warns that the renewed focus on SOEs
in the plan. SOEs that need private capital If all this uncertainty wasn’t enough, may come with additional consequences.
and outside expertise the most tend to be the announcement of China Unicom’s “Having a large share of economic ac-
the poor performers. “When it comes to $11.7 billion mixed ownership deal was tivity controlled by state-owned enterprises
the more indebted companies… you could followed one day later by market confusion means larger potential for corruption, lower
have real problems finding genuine mean- as the SOE’s shares failed to resume trad- potential for innovation and a smaller range
ingful companies with real expertise [will- ing as expected. The issue got sorted rather of opportunities for people to pursue dif-
ing to buy in],” says Fraser Howie, author quickly, but mistakes on the flagship roll- ferent careers and lifestyles,” says Batson.
of Red Capitalism. out of historic reforms do not seem to augur “There are a lot of effects on how the econ-
Yet, even a minority stake in the best well for the future. omy is structured that make a difference to
run, most strategically positioned SOEs, is people aside from the effects on the growth
still a minority stake. A 10% stock purchase Frame of Mind rate.”
is unlikely to translate into sweeping insti- Gao Song believes rebalancing the econo- Fraser Howie has the bleakest view. He
tutional change. “I highly doubt [the private my toward consumption will continue. So, believes true reform is distant and that ev-
minority stakeholders] will be able to exert while SOEs become stronger in upstream erything may be headed in the opposite di-
significant influence over key matters in sectors, their economic significance will rection: “mixed ownership” may not in the
these companies,” says Ying. shrink as the consumer and service sec- end mean private stakes in state companies,
Howie points out that selling minority tors grow, though he views the process as but increasing state control over private
stakes is reminiscent of SOE listings 20 cyclical. companies. “The idea of the private sector
years ago during the Zhu Rongji reforms. “If Beijing successfully pulls off this in China is a fluid concept,” he says. “Ev-
“Part of the argument in the 1990s for list- reform in the next decade, we are going to erything is at the dispersion of the [govern-
ing SOEs overseas was to bring in foreign see positive results in productivity growth,” ment].”

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China Stocks Go
Mainstream
MSCI inclusion of China stocks is a big opportunity
for foreign investors, but risk management is tricky
By Wynne Wang
Image by Wei Bingnan

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In June, MSCI
A
fter years of hesitation, MSCI finally in dollars), more than double the number
agreed in June to include mainland in 2007. China’s market capitalization to-
announced that China stocks in its global benchmark
equities indices. The decision means Chi-
taled RMB 39.9 trillion ($6.2 trillion) as of
May 28, up from RMB 5.9 trillion ($915
it would include nese stocks will become an increasingly
important part of many investor’s portfo-
million) in May 2007. For comparison, the
New York Stock Exchange’s market cap
select mainland lios in the future, and on the news, China
stocks immediately soared to an 18-month
was $21.3 trillion in June, and the Hong
Kong Stock Exchange HKD 30.7 trillion
China stocks high.
MCSI creates the stock indices behind
($3.9 trillion) in early September.
Trading on the two mainland stock
in its indices. some of the world’s largest exchange-
traded funds (ETFs). With the investment
markets is dominated by “retail investors,”
speculative mom-and-pop players notori-
The move, world increasingly moving toward ETFs,
every passive asset manager pegged to an
ous for get-rich-quick and in-and-out trad-
ing habits that drive market volatility. This
although initially MCSI index where China is included will
now be obliged to buy mainland equities,
makes China different from developed
markets where professional institutional in-
small, gives a known as A-shares.
“We believe its strategic importance
vestors play the leading role.
“If you look at market cap, retail in-
big legitimacy (MSCI’s decision) lies in the fact that it
will likely transform China A from a ‘nice
vestors own around 50%,” says Amy Lin,
Senior Strategist of Capital Securities, the
boost to Chinese to have’ to a ‘have to have’ market, and
redefine how global equity investors think
first Taiwanese securities firm to open an
office in mainland China. She notes that
markets—but about their opportunity set and capital al-
location over time,” Goldman Sachs wrote
in the past few years, the balance has been
shifting toward institutional investors. “But
how do the in a July report.
For Beijing, the decision marks a mile-
retail investors may still make up 70% of
daily trading as institutional investors don’t
markets work stone in efforts to draw international funds
into the world’s second-largest market, but
trade so actively.”
The details are more complex. Goldman
and what risks do also indicates how much more regulators
need to do to open the country to the world.
Sachs’s research shows 69% of shares on
the Shenzhen Stock Exchange are owned
they entail? MSCI will take only 222 of the largest and
most liquid mainland-listed companies
by retail investors. In Shanghai, it is only
45%. On the Hong Kong Stock Exchange,
starting from May next year. These stocks for comparison, local retail investors con-
will account for less than one percent of the stitute 20% of daily market turnover, ac-
market capitalization of the MSCI Emerg- cording to the stock exchange itself.
ing Markets Index. In other major markets, trading largely
MSCI’s caution is not without basis— results from investors assessing the impact
China’s currency is not fully convertible of economic trends and specific company
and mainland markets are a long way from results. Not so in China, where trading by
being market-driven. This means investors retail investors tends to be driven by rumors
who track the indices must factor in extra and politics. The most important factor un-
risks. derpinning China’s markets is the implicit
guarantee that authorities will step in and
Taking Stock of the Market resolve any major problems.
China’s equities market was re-established “Markets have a casino characteris-
in 1990 with the founding of the Shanghai tic that has a lot of appeal to people, par-
Stock Exchange and Shenzhen Stock Ex- ticularly when they see people getting rich
change. Today, the Chinese stock and bond around them,” investment legend Warren
markets are now the second and third-larg- Buffett told CNBC in May, referring to
est in the world, respectively. China’s stock markets. “Those who haven’t
China now has more than 3,000 listed been through cycles before are more prone
A-share (RMB-denominated) companies, to speculate than people who have experi-
and 100 B-share companies (denominated enced the outcome of wild speculation.”

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For some astute traders, the dispro- 12% of the market float at the peak and markets, particularly through the “national
portionate number of retail investors is a 3.5% of China’s gross domestic product. team,” a coalition of state-owned financial
benefit. “In my experience, the strong re- By June 2015, the Shanghai market hit institutions—but almost to no effect. On
tail participation is good for professional a seven-year high of over 5,100, more than August 23, more than two months in, the
fund managers because it makes the mar- double its value half a year previously. Ob- government announced that it would al-
ket more inefficient,” says Chris Ruffle, servers voiced concerns that the rise was low China’s state pension fund to invest
portfolio manager with Open Door Invest- driven by speculation and not fundamen- up to 30% of its RMB 3.5 trillion ($527
ment Management Ltd, who has more than tals, particularly given that the overall econ- billion) into equities in another effort stop
20 years’ experience investing in China’s omy was slowing. Half of the companies on the bleeding. The market recovered slightly
stocks. “Retail investors read the newspa- the exchange were priced at 85 times their topping out at 3,600, but fell again in Janu-
per, then they buy this and that. If I go out earnings. The bubble burst on June 12, and ary 2016 to below 3,000. It has since then
to visit the companies and really understand in three weeks the market shed about 30% slowly climbed back to over 3,300.
them, then I will be in a better position.” of its value. By early October the Shanghai Patrick Chovanec, Chief Strategist at
Inexperience, short-term mentality and Stock Exchange was down to 3,000. Silvercrest Asset Management and former
“herd behavior” makes for dangerous mar- Professor at Tsinghua University, wrote in
kets—as seen in the harrowing crash of the The National Team Foreign Policy in 2015 that, while the inter-
Shanghai stock market. After several years Such volatility spooks professional inves- vention may help to put the brakes on col-
of hovering above the 2,000-mark, the tors, but what is more concerning is the lapse, it undermined confidence in market
Shanghai Stock Exchange Composite In- level of government intervention. As the principles. Echoing an infamous remark
dex began rising in December 2014, peak- market began to crumble, authorities em- from the Vietnam War, the piece was titled,
ing and then crashing in June 2015. barked upon invasive measures to stop the “China Destroyed its Stock Market in Or-
The stunning surge was caused by sev- slide. There was ban on selling by major der to Save It.”
eral factors, including falling borrowing corporate shareholders and an outright trad- This August, the China Securities Reg-
costs, a clampdown by the government on ing suspension of almost half of listed com- ulatory Commission (CSRC) lifted many
property investment (one of the few other panies. The government also directed com- of the emergency measures in place since
investment options available in China), panies to buy back their own shares with the crash, noting that the stock markets had
central support for stock investment and finance provided by state banks whenever “achieved smooth operation,” after a “peri-
relaxed rules on margin trading (borrow- it was needed. Not long after, the Ministry od of abnormal fluctuation.” The long-term
ing funds on margin from brokers to play of Public Security announced that it would impact of state-backed investment funds,
the market). According to Goldman Sachs, arrest “malicious” short sellers. the National Team, in the stock market has,
formal margin lending alone accounted for Billions of RMB were injected into however, been profound.

A Share of A-shares
MSCI’s initial inclusion of China’s A-share is small

China China
HK Listed HK Listed China
20.8% 21.5% HK Listed
18.0%
China
A-shares
0.73%
China B &
China
Overseas
China A-shares
7.1%
B& 16.9%
Overseas
Others Others 7.1%
Emerging Emerging China
Others
Markets Markets B&
Emerging
72.2% 70.9% Overseas
Markets
59.2% 5.9%

Source: MSCI

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While some thought the National

Team’s participation might end after the
market stabilized, it has become a major MSCI have broken their own
player and now holds an estimated 7% of
the entire A-share market, according to standards just to shoehorn China in,
Goldman Sachs. Indeed, the state bought
so much stock that it became the majority as the IMF did with the SDR
shareholder of a number of private firms,
effectively converting them to state as-
sets. Michael Every
And the National Team has developed Senior Asia-Pacific Strategist
its own patterns of investment. “The invest-
ments they hold are relatively long term, big Rabobank Hong Kong
cap and value-driven, which could serve to
stabilize the market to some extent,” said
Hao Hong, Research Head with Bocom In- Stanley and Goldman Sachs and the list has some of China’s most important names—
ternational Holding Co. gradually expanded since. China’s “Big Four” banks, China Life In-
Although emergency restrictions are In late 2014, the door opened wider. surance, Petro China, distiller Kweichow
lifted, others remain. In major international The launch of the Shanghai-Hong Kong Moutai, automaker BYD—and are also
markets, companies can conduct an initial Stock Connect scheme allowed equities largely state-owned enterprises.
public offerings (IPO) whenever they meet on the Shanghai Stock Exchange to be However, some of China’s most fa-
the exchange’s conditions, but in China, the purchased through the Hong Kong Stock miliar (and profitable) companies will not
CSRC has strong grip over new share sup- Exchange by foreign investors, and for be included—such as the “BAT” tech trio
plies. mainlanders to buy stocks in Hong Kong. A of Baidu, Alibaba and Tencent. They are
Companies that want to go public need total of $3.4 billion flows between the two listed on the Nasdaq, the New York Stock
approval and may have to wait in line for exchanges each day, with no daily quota Exchange and the Hong Kong Stock Ex-
years. In bad seasons, IPOs are stopped on individual accounts. Unlike QFII, the change respectively.
entirely to avoid weighing down the weak stock connect program requires no special This does not mean that there will be
market. The CSRC then resumes approv- license for trading and investors can repa- a lack of investment opportunity. “If you
als when the market recovers. It approved triate funds without restraints. want to find the biggest industrial com-
225 initial public offerings in the first half In December 2016, China extended the panies in their own markets, you can find
of 2017, more than double the number of a program to the stock market in Shenzhen, several in China, like auto, wine and milk,”
year ago. again allowing $3.4 billion in daily trading. says Amy Lin. She adds that these compa-
The CSRC also caps IPO prices at 23 Currently, more than 1,400 A-shares can be nies are offering generous dividends and
times a given company’s historical earn- accessed via the Stock Connect program of stable growth.
ings, aiming to prevent more volatility the 3,000 listed A-share companies. Trad-
in the secondary market. Taken together, ing volume through the scheme has picked Right Choice?
these factors create unique conditions. “A- up steadily with the volume from the main- MSCI’s decision to include A-shares in its
shares can be inscrutable, with a different land constituting 5% of the Hong Kong indices was the result of immense pressure
trading environment that international fund market’s turnover in April, according to a applied by Beijing after the reforms of the
managers will find hard to adapt to,” says Hong Kong Exchange report. Stock Connect program. But numerous
Hao Hong. The real achievement of the Stock Con- problems remain, as does heavy state over-
nect was to lay the groundwork for MSCI’s sight of the market.
Gradual Opening decision. MSCI will essentially be building One issue is trading limits on A-shares,
The China A-share market was first cau- on top of that. The A-share inclusion into which are only allowed to rise or fall by
tiously opened to outside investors in 2003. MSCI will take place as a two-step process 10% on a trading day. Not only are there
Under the Qualified Foreign Institutional in May 2018 and then later in August. By restrictions on price fluctuations, but A-
Investor program (QFII), selected foreign August, China A-shares will account for shares are suspended from trading far
institutional investors can invest in China’s 0.7% of the MSCI Emerging Markets In- more often than on other global exchanges.
stock markets with significant restrictions. dex. Reuters reported that during the month of
It was in effect an early effort at interna- The initial list of 222 comprises stable, July this year, an average of 265, or one in
tionalizing the RMB. Early QFII players large-cap companies are not dominated by every 13, listed companies in China sus-
were big names such as UBS, Morgan China’s infamous retail investors. They are pended trading for some period, with the

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scrutiny of companies and individuals

Mom-and-Pop Market moving money out of the country. The
China A-shares are dominated by retail investors move was seen as an indication that the
IMF had acted too soon, and some analysts
National team 7% Foreign
Domestic expressed concern that the situation may be
institutions 6% investors repeated in the stock market.
1.4% “MSCI have broken their own stan-
dards just to shoehorn China in, as the IMF
did with the SDR,” says Michael Every,
Senior Asia-Pacific Strategist with Rabo-
bank Hong Kong. “There are many things
negative about the decision, because China
has not met key criteria and there is no real
Domestic retail evidence that it can avoid a future repeat of
State and restricted investors and 2015’s market drama going forward—to
shares 30% unclassified 56% say nothing of its problems with debt, hous-
ing, capital controls and political risk.”
Source: Goldman Sachs

New Era
number of suspensions rising 30% from an State-owned enterprises are not purely China’s inclusion into the MSCI indices
average of 202 in January. profit-driven; they also have significant re- marks a new era in China’s emergence
This prompted MSCI to issue a warn- sponsibility to support government policy as an accepted part of global equities. Al-
ing to China barely a month after the an- (see article page 30). They ultimately an- though the market capitalization weighting
nouncement of index inclusion. “If we swer to the Chinese Communist Party be- of each of the initial company stocks is only
find a company suspends for a long time, fore they answer to any other shareholders, set to 5% of its market cap, MSCI will con-
over 50 days, we will remove it from the to say nothing of foreigners. sider increasing all to 100% should market
index, and we will not bring it back to the Another issue is China’s capital con- reforms continue. It will also consider in-
index again for at least another 12 months,” trols and the ability of investors to get their cluding the remaining 226 or so companies
MSCI’s Head of Research for Asia Pacific, money out of the country. Although inves- in the future.
Chin Ping Chia announced. tors can currently repatriate funds, there is This is a huge carrot to dangle before
Some recent suspensions resulted from no guarantee that will always be the case. In Chinese authorities who desperately want
trading volatility—usually smaller compa- fact, there is precedent for the China rolling their markets to be more widely owned out-
nies hitting the pause button to avoid a price back promises. side the country. Global investors keen to
crash. But the number of suspensions of Soon after the RMB was added to the get involved in China will, however, need
larger companies has also increased as Bei- basket of Special Drawing Rights curren- to accept the local equities market for what
jing steps up consolidation of state-owned cies defined by the International Monetary it is—a highly speculative government-
enterprises. This hints at another problem- Fund (IMF) in October last year, China controlled but growing market.
atic aspect of a state-controlled market. tightened its capital controls, upping the The size of the money flows that follow
the MSCI decision will reveal how accept-
able that is. By MSCI estimates, $17 bil-
lion to $18 billion could initially flow into
Over the next five to 10 years, China China from the initial inclusion of mainland
China stocks.
will emerge like a strict asset class, a “I think anybody can see that… eventu-
bit like Japan in the 1980s ally China will be entirely included,” says
Ruffle, noting that when this occurs, China
will be over 50% of the Emerging Markets
Chris Ruffle Index. “My contention is, over the next five
to 10 years, China will emerge like a strict
Portfolio Manager asset class, a bit like Japan in the 1980s. It
won’t be a sub-sector of the emerging mar-
Open Door Investment Management ket, but a stand-alone sector like America
and Europe.”

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Sharing Economy on
Borrowed Time?
The hype will inevitably
wear away
By Tom Nunlist
Image by Wei Bingnan

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Economy & Finance

The sharing
I
n the 1960s and 1970s, the most popular fice space Mydream+. “As the technology
wedding gift in China was a bicycle. By evolves, we will have more areas covered
economy the end of the 1980s, there were 500 mil-
lion bikes in China and Beijing had gained
by the shared economy.”
Investors are naturally following the
exploded in China the title of “Bicycle Kingdom,” with free-
way-sized bike lanes accommodating mil-
trend. Venture capitalists in China threw
$31 billion at startups in 2016, an increase
this year, with lions of commuters.
Then things began to change. Bike
of nearly 20% from the previous year, ac-
cording to KPMG. While it is unclear
companies for lanes shrank as car lanes grew, bus routes
and subway systems underwent massive
what proportion of that went into sharing
economy startups, those businesses seemed
bikes, umbrellas, expansion, taxi cabs became affordable and
electric scooters pervasive. The humble bi-
to steal the show—according to Crunch-
base, a database which keeps track of the
toys and more all cycle never quite disappeared, but society
moved on to bigger things.
tech startup industry, Mobike and Ofo have
raised more than $2 billion collectively.
taking part in the But in 2016, a stroke of genius helped
the bike stage an unlikely comeback as part
But there is a healthy degree of skep-
ticism about whether it can all work. The
hype. But with the of the “sharing economy.” Bikes can now
be rented via an app and you can park them
sharing space is being sustained by hot
money and a great deal of official support,
concept reaching anywhere on the street.
Such is the ubiquity, particularly of the
or at least rhetoric. What will happen when
the excitement dies, as it presumably will?
fever pitch, two leading companies—Mobike (10 mil-
lion orange-and-silver bikes) and Ofo (20
“I can’t see why some of services won’t
succeed, and won’t keep going,” says An-
sharing could be million canary-yellow bikes)—that the bi-
cycle can be thought of as the two-wheeled
drew Atkinson, Marketing Manager at
brand consultancy China Skinny in Shang-
in for a reality flagship of sharing, spreading the gospel
of the business model. In March, Shang-
hai. “But I definitely feel some of the busi-
ness models have not been fleshed out.”
check hai was the most shared bike-heavy city in
China, with 450,000 on the streets. Terms and Limitations
Since shared bikes hit the streets, the One of the messiest things about the “shar-
phrase “sharing economy” has gone from ing” space is the blizzard of terms surround-
buzzword to boom market. But defining the ing the phenomenon: sharing economy,
sharing economy can be confusing. Uber access economy, collaborative economy,
and Didi, for example, are often referred on-demand economy, freelance economy,
to as “sharing economy” companies, but gig economy. According to April Rinne,
many disagree. The term usually covers a globe-trotting sharing economy consul-
businesses that share underutilized assets, tant who, among many other things, sits on
like cars or spare rooms—but China’s pro- China’s National Sharing Economy Com-
liferation of the scheme has muddied the mittee, the public often assumes these are
concept. While there are businesses famil- all the same when they are in fact different,
iar to Westerners—shared offices, cars and although overlapping.
rides—there are also ideas that seem a little The definitions are fluid even for ex-
kooky: shared basketballs and umbrellas. perts, but a few examples can help define
According to China’s State Information the boundaries. Take Bla Bla Car, the $1.5
Center, transactions in the country’s shar- billion French ridesharing platform that
ing economy last year were worth more connects drivers making long trips. Rid-
than $500 billion and involved more than ers contribute to the cost of the trip, but
600 million people. The Center estimated the driver doesn’t earn money, so it is truly
that by 2020, the sector could account for shared—although the platform is mon-
10% of GDP growth. Regardless of the etized by taking a small cut. Bla Bla Car
numbers, it is clearly transforming the way meets Rinne’s three primary criteria of a
people live. sharing company: utilization of under-used
“I think this is an evolution of society,” assets, decentralization and an element of
says Bill Li Wenlei, founder of shared of- relationship/community building.

42 / CKGSB Knowledge 2017

 Fall 2017

Now take Uber. The overlap with the

Bla Bla Car model includes decentraliza-
tion and shared use, but there are differ- It’s the lawlessness of China that
ences, the most important being that Uber
drivers drive to make money. Some surveys makes [the sharing economy]
find a third of them do it as a full-time job
(Uber even offers drivers financing to pur- possible
chase cars.)
Many other sharing economy business-
es fall somewhere in between. Airbnb, like Andrew Atkinson
Uber, has also become professionalized, Marketing Manager
but retains a focus on relationships. Shared
office spaces are centralized and often pro- China Skinny
fessional, but the community building as-
pect is extremely strong.
The Mobike and Ofo model is different the convenience factor that makes them bile phones for a small fee, for example
again. The bikes are owned by the compa- work would be eroded. The key innova- at a bar or restaurant. But the project that
nies, so the focus is not on under-utilization tion, after all, is their “anywhere” nature. has got the most giggles was an umbrella-
and in practice there is little focus on social “People just get out of the metro and jump sharing startup, Sharing E Umbrella. The
interaction. Rinne, however, notes it re- on.” company lost nearly all its initial 300,000
moves ownership from an object you once The second factor aiding the growing umbrellas just a few weeks after launching
had to buy. This is the model of many of of sharing business in China is the mobile due to holes in the plan—people did what
the businesses in the recent sharing explo- payments revolution driven by Alibaba’s they do with their own umbrellas, left them
sion in China, and it may be spawning yet Alipay and Tencent’s WeChat Pay, which haplessly at home, the office or on the train.
another term. allow consumers to painlessly spend even While it is easy to scoff, Ramos points
“It is really Renting 2.0,” says Oscar tiny amounts of money by simply scanning out that these types of failures are a natu-
Ramos, Program Director at Chinaccelera- a QR code (an advanced barcode). “[The ral part of the business of innovation. “The
tor, a startup accelerator in Shanghai. sharing economy] in China would not be truth is that there are a lot of inefficiencies
what it is without mobile transactions,” in the world, and where these inefficien-
Trail of Disruption says Atkinson. cies are, we don’t know,” he says. “Airbnb,
Renting 2.0—or whatever you choose to The rapid adoption of mobile payments which is probably the first large example of
call it—is now everywhere you look in Chi- in the past few years is itself driven by a a sharing economy business, looks super
na, changing city life, upending businesses third factor in China, which is the general crazy if you think about it. Even the inves-
and sometimes just being in the way. That openness of people to try out new things. tors that were backing the company weren’t
last factor has become a hallmark of shared “The first thing people think about consum- sure it would work.”
bikes, especially as Mobike, Ofo and others ers in China is volume,” says Ramos. “But Ramos believes all the firms launched
compete to outspend each other for market the best thing they have is an open mind, so far have identified real problems. Get-
share. The station-less nature that makes flexibility and lack of legacy.” ting caught with a dead phone battery re-
them so convenient also makes them incon- These factors set the stage for the shar- ally is a huge pain. And the way people use
venient, as people often park them poorly, ing economy invasion currently moving umbrellas really is wasteful—who doesn’t
or that they tend to pile up in the hundreds across the spectrum of personal goods. have a half dozen lying around?
at heavily trafficked spots. Some cities have Some seem to be solid ideas. There is a bas- “In innovation, the difference between
begun wholesale impounding them to clear ketball sharing startup, which works as an crazy and brilliant is just so fine that you
the way. unmanned station near basketball courts, so can never tell the difference,” says Ramos.
But this hints at a reason why sharing you can go shoot hoops even if you didn’t “You just have to follow the customer.”
businesses have taken off in China: the bring your own ball. There’s also a suit- Another unexpected idea to gain trac-
country’s dynamic nature at street level, case sharing startup in tightly-packed Hong tion recently is shared toys. There are at
both in terms of lifestyle and in testing out Kong where owning luggage means finding least three companies in the space: Wanju
new ideas. space in your tiny apartment for a big box Zuzu (Toy Rent Rent), Wan Duoduo (Play
“It’s the lawlessness of China that you use only occasionally. More) and Baobei Banjing (Baby Radius).
makes it possible,” says Atkinson, observ- Others are less obvious. Several com- Xie Wenting, a 31-year-old mother in Bei-
ing that if the bikes were better policed, or panies have popped up that rent power jing, uses the latter to provide toys for her
people more careful about parking them, banks, so that users may charge their mo- toddler. “In my experience the toys are

CKGSB Knowledge 2017

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Economy & Finance

clean,” she says. “RMB 469 ($71) per year sharing are home-grown, at a time when “To do business in China, you must
is cheap… I recommend it!” China is hungry to stand out more as a heed the call of the Party, the call of the
On closer analysis, the concept is a sen- global thought leader. “Any opportunity government,” he says.
sible solution to a practical problem: qual- the government gets to push… something
ity toys for children can be expensive and that puts China on the world map in terms Share Me the Money
kids quickly outgrow them. Why not use of being a leader, it is going to receive a lot But having the snappy idea and the right
them for a few months and exchange them of support,” Atkinson says. slogans in no way guarantees financial
for new toys? All that support has a flipside, in that success. And in China’s so-called sharing
companies that are not really sharing are economy, there are few clearly workable
Hot Money, Big Support trying to elbow in on the buzz in what April business models. For starters, many busi-
What Ramos does see as a problem is all Rinne calls “share washing.” nesses seem way too cheap. Shared bikes
the investment cash flying around. “A lot “We have seen a lot of companies adopt started out at only RMB 1 per half hour,
of cash kills startups,” he says. “When you sharing economy language when they are which puts profitability into question given
have too much money, you solve the prob- not sharing economy at all,” says Rinne. the initial cost of the bikes and upkeep.
lems with money, not creativity.” She points to recently launched “shared And the free-for-all market-share battle has
Ramos calls out E Umbrella specifi- gym pods” hitting the streets in Beijing. devolved at times into a literal free-for-all
cally, and CEO Zhao Shuping’s promise The “gym” consists of a treadmill in a tiny with companies giving away rides at no
to carpet bomb cities with 30 million more air-conditioned cube parked in a public lo- cost.
umbrellas by the end of the year. Yet, there cation. And of course, gyms are already a But like other aspects of innovation,
is still no clear plan to keep them from dis- community-accessed service, which makes it may be a matter of toying with differ-
appearing yet again. the whole thing doubly strange. ent models until something hits. Atkin-
At the same time, the emergence of Even more amusing is the “shared book son brings up the advertising potential of
the sharing economy has aligned with sev- store” launched earlier this year in the east- these companies—already companies are
eral of the government’s goals, including ern province of Anhui. Some critics pointed parasitizing bike sharing by slapping them
finding ways to boost the economy, save out that it seemed scarcely different from with sticker advertisements and tying small
resources and reduce pollution. Those at- video rental businesses, which disappeared business cards to the handlebars. The um-
tributes have garnered support from the long ago. But that of course ignores the fact brellas, too, may be monetized this way, he
highest levels. a free “book sharing” program has existed says.
“The country’s sharing economy, en- for hundreds of years—it is called the “li- But he says that for some investors,
abled by the Internet Plus, has been instru- brary.” profit may not even be the goal. “I feel like a
mental in absorbing excess capacity and One view is that these launches are cyn- lot of incredibly wealthy Chinese investors
creating new jobs through its various new ical attempts to cash in on a buzzword. But are starting these things because it is cool,
business models,” said Premier Li Keqiang Wei Wuhui, a popular tech business com- and it is a trophy, a pinup sharing brand on
at a State Council meeting on the topic in mentator and lecturer at Jiaotong Universi- the internet of things,” says Atkinson.
June. “We should give credit to the shar- ty in Shanghai, says that Chinese entrepre- Wei Wuhui has a different take on
ing economy as a reinvigorating force in neurs may just being doing what needs to the question of profitability. He says that
China’s economic growth.” be done in a moment when the government the most popular of these companies in
Also, innovations like station-less bike has seized upon the idea. fact function as proxy battle space for the
competing payment systems, Tencent (We-
Chat Pay) and Alibaba (Alipay). Such was
the case with ride-hailing companies Didi
In innovation, the difference between Dache, backed by Tencent, and Kuadi
Dache, backed by Alibaba, as they each
crazy and brilliant is just so fine that burned hundreds of millions of dollars in
you can never tell the difference competition before finally merging to form
Didi Chuxing. Alibaba lost and now Didi
uses only WeChat Pay.
Oscar Ramos “[For them] losing money is really no
problem,” says Wei. It’s about dominance
Program Director in the payment market. Mobike and Ofo,
he says, are a continuation of that battle,
Chinaccelerator as they are backed by Tencent and Alibaba
respectively.

44 / CKGSB Knowledge 2017

 Fall 2017

Only the biggest of the sharing opera-

tions fall into this category—basketball and
power bank sharing are too niche. But an- We have seen a lot of companies adopt
other important consequence of these busi-
nesses and the scan-to-pay functionality is sharing economy language when they
what Wei calls the “data-izing” of every-
thing they touch, and every user they touch. are not sharing economy at all
That can, for example, be leveraged to
serve up advertisements. It’s worth noting
that model has long been proven by titans April Rinne
like Facebook. China National Sharing Economy
Permanently Borrowing Committee Member
Unproven though the business models may
be, the concept of “sharing” seems here to
stay. Oscar Ramos compares the situation might be until it appears. still a minority, and it is easy to see how
to the Groupon copycat craze that blew up For both China and wider world, April the ascendance of hundreds of millions of
around 2010—the innovative model re- Rinne believes that we are at the begin- more people can create real strain. Ramos
quires a threshold of customers to commit ning of a new lifestyle in an age of mass notes that the compound where he lives in
to purchase before a coupon deal is acti- consumer marketing that has, up until now, Shanghai has eight towers of about 40 sto-
vated. made ownership something sacred. “I have ries each and no parking. If access to a car
At one point, there were hundreds of to say we have barely touched the tip of is a hallmark of the middle class, where will
such companies in China, which led to the iceberg in terms of the kinds of ways you put them all?
a predictable meltdown. Fast-forward to we can rethink whether you access some- The sharing economy, he thinks, has an
2017 and there are only a few survivors, but thing or you own,” says Rinne. In the future answer, particularly if it ends up looking
they have healthy businesses. That does not “when somebody takes a snapshot of their like Mobike, but for vehicles—that is, by
dampen Ramos’s enthusiasm. “What is ex- lifestyle they will see many more things removing actual ownership while at the
citing about this whole thing is that we will that they access or subscribe to.” same time maximizing access. “It is a more
probably see another [sharing company] Such a change may be far, far more im- efficient way to roll out ownership,” he
that in six months becomes indispensable,” portant in China than anywhere else, simply says. “And a faster way to give people a
he says. It is impossible to say what that because of scale. The new “middle class” is better quality of life.”

More Pie to Share

Revenue from the sharing economy is expanding

Source: The Sharing Economy Research Center of the State Information Center

CKGSB Knowledge 2017

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Economy & Finance

ckgsb business conditions index

Smooth Sailing in 2017
But rising prices are cause for concern

I
n September 2017, the CKGSB Business Conditions Index
(BCI) stood at 62.4, a significant rise from last month’s figure
of 56.1. This is the second highest value of the BCI in 2017,
second only to 63.9 in April. Among the sub-indices constituting
the BCI, those representing sales and profits have risen greatly,
while the corporate financing environment has improved slightly
and the inventory status remains unchanged. This shows that de-
mand in the economy has risen significantly and that the prospects
for economic growth are rosy.
China’s economic growth this year should be smooth. Three-
quarters of the year have already passed, with GDP year-on-year
growth for the first half year reaching 6.9%. Because the BCI is
a predictive index, and its outlook period is half a year, we think
that China’s economic development will comfortably realize the
growth goal set by the government for 2017. The BCI is directed by Li Wei,
The BCI asks respondents to indicate whether their firm is more, Professor of Economics at the
Cheung Kong Graduate School of
the same, or less competitive than the industry average (50). Business

The BCI hit its second-highest mark this year

CKGSB Business Conditions Index
75

70

65 62.4

60

55

50

45

40
09-2011
03-2012
06-2012
09-2012
12-2012
03-2013
06-2013
09-2013
12-2013
03-2014
06-2014
09-2014
12-2014
03-2015
06-2015
09-2015
12-2015
03-2016
06-2016
09-2016
12-2016
03-2017
06-2017
09-2017

46 / CKGSB Knowledge 2017

 Fall 2017

Corporate sales are up… …along with corporate profits

100 Corporate Sales Index 95 Corporate Profits

90 85
84.7
80 75 73.3

70 65

60 55

50 45

40 35
09-2011
03-2012
06-2012
09-2012
12-2012
03-2013
06-2013
09-2013
12-2013
03-2014
06-2014
09-2014
12-2014
03-2015
06-2015
09-2015
12-2015
03-2016
06-2016
09-2016
12-2016
03-2017
06-2017
09-2017

09-2011
03-2012
06-2012
09-2012
12-2012
03-2013
06-2013
09-2013
12-2013
03-2014
06-2014
09-2014
12-2014
03-2015
06-2015
09-2015
12-2015
03-2016
06-2016
09-2016
12-2016
03-2017
06-2017
09-2017
Rising consumer and producer prices may signal trouble This month, the consumer and producer prices
indices (at left) increased greatly, which is sig-
80
nificant. Although it is unclear whether this
Consumer Prices Index Producer Prices Index 76.4

trend will continue, it needs to be carefully

70
watched. Since the period of reform and open-
ing-up, China’s economy has suffered several
60 large challenges, often related to high inflation.
Given that China’s economic growth has been
50 rapid, the rise in prices can be understood to a
certain degree, but the question is how much is
40
61.1 acceptable? Except for consumer goods and in-
termediate goods, we also need to consider that
if these items all see large price increases, the
30
prices of other things, such as property, may also
rise. When we consider these factors collective-
20
ly, then the damage to the economy caused by
03-2013
06-2013
09-2013
12-2013
03-2014
06-2014
09-2014
12-2014
03-2015
06-2015
09-2015
12-2015
03-2016
06-2016
09-2016
12-2016
03-2017
06-2017
09-2017

the rise in prices may be underestimated.

Neither labor costs nor overall costs have ever been low in BCI history
100 Labor Costs Index Overall Costs Index
90.0
90
88.2
80

70

60

50

40
09-2011

03-2012

06-2012

09-2012

12-2012

03-2013

06-2013

09-2013

12-2013

03-2014

06-2014

09-2014

12-2014

03-2015

06-2015

09-2015

12-2015

03-2016

06-2016

09-2016

12-2016

03-2017

06-2017

09-2017

CKGSB Knowledge 2017

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Economy & Finance

ckgsb business sentiment index

Economic Structural Problems Persist

A
lthough China’s official GDP for the first two quarters,
both at 6.9% year-over-year, and industrial growth ex-
ceeded expectations, China’s industrial economy has not
yet bottomed out. The CKGSB Business Sentiment Index in the
second quarter stood at 46, down from 47 in the previous quar-
ter, but still indicating a slight contraction. Moreover, overcapac-
ity remained at a historical high, both in terms of its prevalence
and severity, and product and cost prices continued to rise, while
production stayed flat. At the same time, the gap between the BSI
of state-owned enterprises and that of private enterprises widened
a bit—they are 61 and 51 respectively. All these findings suggest
that the structural problems of China’s industrial economy remain
a significant concern.
The CKGSB BSI is based on data collected from our quarterly
surveys of around 2,000 industrial firms in China. A total of 2,050
firms surveyed for the 2017 Q2 report, of which 1,670 firms were The BSI is directed by Gan Jie,
also polled in the 2017 Q1 survey. The survey design ensures that
Professor of Finance at the
Cheung Kong Graduate School of
our sample fully represents industry, region and company size. Business

Key Findings
Business Sentiment Index • The low BSI in Q2 was, as
Diffusion Index of current operating conditions
in previous quarters, a result
Diffusion Index of expected operating conditions of weak investment
Diffusion Index for investment timing • Only 1% of the firms con-
60 Business Sentiment Index
sidered it to be a “good”
54
53
54 54 54 time to make fixed-asset in-
50 51 vestments
50 49
• 71% and 28% replied “aver-
47 48

age” and “bad” respectively

47 46
46 46 46
40 38
36 36
34 34
The BSI is the simple average of three
diffusion indices: current operating
30 conditions, expected change in
operating conditions and investment
timing. A reading above 50 indicates
20 expansion, while a reading a below 50
2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 indicates contraction.

48 / CKGSB Knowledge 2017

 Lack of Demand is a Big Issue
90% 2017Q2 2017Q1 2016Q4 2016Q3 2016Q2
79% 81%
• Weak demand is still by far the
80%
72% 71% 72%

biggest challenge for the industrial

70%
60%
50% economy
40% • 72% of the firms surveyed in Q2
30% indicated lack of orders
20% 16% 18%
20% 20% 19%
16%
19% 19%
15% 13%
12% 14%
15% 17%
12%
• Costs were listed as the second
10%
largest issue, particularly labor and
0
Lack of orders Labor cost Raw material cost Macro industrial policy raw material costs

• Contrary to the media discus- Influence of Real Estate Overplayed

sion, the survey did not find the
real estate sector to have an out-
Cement Smelting and Pressing of Ferrous Metals
Metal Products for Construction Coal Mining and Washing
Whole Sample
sized influence on industrial growth
100
90
80

• With the exception of construction- 70

60
related metal products, the business 50

sentiment, operating conditions and 40

production indices of real estate-re-

30
20

lated industries were below that of 10

the the whole sample

0
BSI Diffusion index of price Diffusion index of over-supply % of Firms with 20%
in domestic market excess capacity and above

Price Rises are Driven by Cost Rises • Among firms with product cost in-
100%
93%
Price Inc>=5% flation above 5%, cost rises were the
90%
Whole Sample
most prominent
80%
74%
• The proportion of firms with unit
70% 65% cost increases above 5% and 10%
60% were 93% and 10%, respectively
50%
49% 50% • Unit cost increases are mostly re-
40% lated to raw material costs—26%
30% 26%
of these firms reported raw material
20% cost rises above 5%
10%
10% 8%
1% 2%
0
Cost Inc >=5% Cost Inc >=10% Cost Raw Inc >=5% ProductionChangeDI %Over Supply firms

Conclusion
• The biggest challenge facing the industrial economy is still overcapacity. Both its prevalence and
severity remain at close to historically high levels
• Supply-side reform this year should focus on the reduction of overcapacity, while facilitating indus-
trial consolidation to improve overall competitiveness
CKGSB Knowledge 2017
/ 49
Interview

Staying Legal in
China

Dan Harris, attorney

T
here are few, if any, aspects of doing business as a foreigner in China that are

and co-author of China

easy, but understanding local law can be the most difficult. Beyond the chal-
lenge of legal compliance, one must also understand local regulations well
Law Blog, discusses the enough to proactively protect operations and assets—for example, through effective
use of copyrights.
evolution of China’s legal Dan Harris, an attorney at his Seattle-based law firm Harris Bricken, has been
helping clients navigate China’s legal landscape for almost 15 years. Since 2006, he
landscape has co-authored the China Law Blog, which delivers practical knowledge of Chinese
law as it impacts on business. In this interview, Harris discusses legal issues impor-
tant to companies doing business in China, including compliance, corruption and IP
By George Wihelm
protection.

Q: There are important changes occurring in China’s legal landscape, both in terms
of the laws and in enforcement. There is increased anti-corruption oversight, stricter
employment laws, the new cybersecurity law and so on. What is the main theme you
see?
A: If you go back to when we first started the blog, we have been calling the same
trend every single year: China is moving more and more towards enforcing its laws.
There are a few things to be aware of. One area where you really see increased en-
forcement is in laws that generate revenue—tax laws and customs laws, which have
been very sophisticated for years now. The word is not going out enough that you do
not mess with China on customs, that you do not mess with China on taxes and you
do not mess with China on employment law. These are being vigorously enforced.
And when I say employment law, I’m not talking about if you don’t pay overtime the
government will come and fine you. No—if you don’t pay overtime, then the person
affected will sue you.

50 / CKGSB Knowledge 2017

 Fall 2017

located, half their employees were not on the grid and a foreign
owner is not going to be able to get away with these things. When
As the rules have you get into compliance, the costs for the foreign company will usu-
ally go way up as compared to your typical Chinese company. But
for a high-profile company like Alibaba or Tencent, enforcement is
become more pretty similar as for foreigners.

numerous and more Q: IP law covers everything from counterfeit bags to theft of trade
secrets. Considering that diversity, how has IP protection and en-
forcement progressed in China in the past few years?

strict, I am sometimes A: I speak on China IP about 25 times a year. What I can speak to
best is what I call “private IP law,” meaning registering trademarks,
copyrights, patents and trying to enforce those things with the ap-

asked, “Has China propriate authorities. This is 99% of what our law firm does when
it comes to China IP. I would say that it has always been better in
China than the media makes it out to be and it has gotten better ev-
gotten so difficult for ery single year. Often when you read about a problem, it’s because
the foreign company messed up, not because China is a bad place
to do business.
foreigners that they There are many things you can do to protect your IP, but un-
fortunately foreign companies often don’t. Companies will hire a

shouldn’t go there?” factory to manufacture their widgets and won’t do a thing to try to
protect themselves. Six months later they’ve learned that their fac-
tory is selling their widgets all around the world. Then they call us

For a lot of firms, the up and say, “Stop these people. They’re counterfeiting!” But legally
speaking, they are not because you don’t have any contract with
them saying they can’t do that, you haven’t registered your trade-

answer is “yes” mark in China and you haven’t registered your trademark in any of
the countries where they’re selling your widgets. There is nothing
you can do. If you had a good contract from the beginning, there is a
good chance your Chinese factory wouldn’t have done that.
As the rules have become more numerous and strict, I am some-
times asked, “Has China gotten so difficult for foreigners that they Q: So counterfeit goods are no longer a problem?
shouldn’t go there?” For a lot of firms, the answer is “yes.” Year A: No, there are still huge amounts of counterfeit goods coming out
after year we seem to grow about 20% in revenue, but we probably of China and it’s hard to stop. The problem is not with the law itself.
shrink in the number of clients by 10% or 20%. We have fewer cli- Say someone is putting your registered trademark on basketball
ents, but each client is paying more. The reason is because you need hoops, we could sue them in China and the odds are overwhelming
to be bigger than you used to be to survive in China, and there are that we will win. But then the question becomes whether there is
many more laws you need to be on top of. a company that we can go after or is this just somebody in a small
town making basketball hoops? If it is the latter and you do shut
Q: The foreign business community sometimes complains that laws them down, they can just open somewhere else. That is a tough
are not fairly enforced in China. What is your view? issue.
A: If you’re a foreign company, you need to comply with China’s But things are getting better. China, like every other country,
laws. That you see some Chinese company down the street getting is going to start caring about intellectual property when it makes
away with something, you should not for a minute think that you can sense from a domestic perspective to do so. That occurs when there
also get away with it. China always tests out its laws and enforce- are companies with money and power who want a good IP system.
ment on foreign companies and, to be fair, the United States tends to China has pretty much reached this point. There is proof of that
do that as well. But there are certain things that are troubling about in the number of trademark filings, copyright filings and patent fil-
China when it comes to how foreign firms get treated. ings, which are increasing every year in China. The number of IP
We had a client that wanted to buy a factory and asked us to do lawsuits keeps increasing as well. Why would Chinese companies
an analysis. We told them that, although the factory is making $1 spend their money on these things if there were no benefits? They’re
million a year, if you buy it, it’s going to lose $2 million a year. Of not just throwing money away—companies don’t do that—so those
course, they asked us how that could be. The factory was illegally numbers are evidence of improvement.

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Interview

Q: The new cybersecurity law appears to have important IP impli-

cations and some multinationals have voiced concerns. What is the
relationship between IP law and the new cybersecurity law?
A: People love to say, “China’s laws are vague.” In fact, a lot of times
Countries start caring
the laws are clear and that’s their excuse for having messed up. In this
case, the laws are vague and I think the government wants to be vague
as they test them out. I’m not sure how it’s going to impact IP, but
about intellectual
one aspect of the law is that it requires data storage to be in China and
the issue is that the Chinese government potentially has access to that.
People are afraid of this, but I think only a small percentage of
property when it makes
all companies should be really afraid. Is China going to go in, steal
the secret for Nike’s new shoe sole and give it to some Chinese
sneaker company? Probably not. But if some company has com-
sense from a domestic
puter technology that could make China’s missiles go faster, then
yeah, they just might. But if your company makes next-generation perspective for them
rubber duckies, I don’t think it is a big risk.

Q: What about IP protection as it relates to partnerships with Chi-

to do so. China has
nese companies and technology transfer?
A: What we do for our clients is to look out for “fake deals,” mean-
ing a Chinese company proposes a joint venture (JV), but in reality
reached this point
wants to learn about your capabilities, then boot you out and steal
your technology. We have a test to see if they want to do a joint
venture with you for the long term. If the Chinese partner asks to do thousands of trademarks and copyrights in China and we’ve formed
the JV and have ownership of the intellectual property, we say, no, hundreds of companies and nobody has ever once hinted at a bribe.
we are going to license the intellectual property to the joint venture. We used to do a lot of work in Russia. We would file a trademark
That’s a good way to tell whether they want to steal your technology and an official would ask, “Do you want us to expedite this?” and
or just use it and make money off it. If it was the former they would then point to the dusty pile of paperwork from 1959 that had not
likely reject the deal. been expedited. That does not happen in China.
Interestingly, the past few times this has happened, we thought One change we have seen is increased enforcement of tax laws.
the Chinese partners were up to stealing and we were proven wrong. We received three phone calls last Christmas from people who said
I have a friend who is a technology consultant in China and he has they were outside China, that their taxes were being audited in Chi-
noticed that Chinese companies are much more focused now on the na and the Chinese government had discovered all sorts of irregu-
finances and the money of the deal, rather than just the technology. larities. All these people said things like, “My accountant told me
The difference is that these companies are starting to be run by more that everybody’s doing this in China.” I have no sympathy. What
sophisticated business people with MBAs and finance degrees, in- they are saying is that they knew that what they were doing was il-
stead of by engineers. Their goal is not just to grab the technology legal, but they thought they would get away with it.
and figure out what to do with it. Their goal is to make money by
building up a relationship with the other company. Yes, they want Q: What should companies do to keep up with changes in the law
to do business with our clients because our clients have technology, in China?
but they want to exploit the technology together to make money. A: Let’s say you are a real estate developer in the United States,
you’ve got to keep up on all the local construction laws. How do
Q: Another significant change has been increased enforcement of you do that? You join associations and you make sure your own
anti-corruption laws. What is there to look out for in this area? employees do whatever they can to keep up. You can’t pay your
A: China is stepping up enforcement, but is it based on the heinous- lawyers to do that because it would cost way too much money.
ness or the level of the crime, or is it based on who’s committing it China is the same. We know the big picture laws and, if you
and where they are politically? That’s the big question. In terms of want, you can pay us to figure out what it’s going to take to bring
foreign companies, we tell our clients: you need to think not only your specific electronics widget through customs. But you probably
about the US anti-corruption laws, but also China’s anti-corruption have people who know electronics better than we do, and so I would
laws. And we have always told our clients this: do not bribe any- urge you to go talk to the government, to go find the right associa-
body. It’s a bad idea on about 100 different levels. tion. This is not easy. But the good news is, a lot of times those are
To put things in perspective, China’s about in the middle in the smaller laws and if you mess up it’s not as big a deal as, say, not
world in terms of corruption. It’s not that bad. My law firm has filed having contracts with your employees.

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BGI’s Gene Dreams

China’s gene sequencer is taking
its next big steps
By Krystal Hu
Image by Lisa Ye

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 Fall 2017

China's biggest
W
hen the opening bell peeled at the says Zhou Rongjia, Genetics Professor at
Shenzhen Stock Exchange on July Wuhan University, one of BGI’s partner
genetics 14, it heralded a breakthrough for
the Chinese biotech industry. BGI, a pio-
schools for talent recruitment and develop-
ment. “It has initiated and participated in
company, BGI, neering gene-sequencing firm, had become
the first genomics company listed in China,
a number of major international scientific
research projects and achieved remarkable
is a darling of raising RMB 547 million ($80.6 million).
A good listing quickly became great
results.”
However, in a country prone to mar-
the Chinese tech for BGI, which specializes in human, plant
and animal genomics research. Initially
ket hype, there are those who view BGI’s
dramatic stock performance with a dash of
and healthcare valued at RMB 13.64 ($2.11) per share,
BGI’s stock price skyrocketed tenfold in
skepticism.
“The market valuation of BGI is high,
industries. the first trading month, hitting RMB 131.63
($20.36) by mid-August. Its shares soared
mainly because there is much room to
imagine future developments in the genom-
After almost by the maximum daily increase of 10%
(China’s stock markets have government-
ics industry,” says Zheng Wei, Biotech
Analyst at TF Securities, a Chinese venture
two decades set limits designed to curb volatility) for
19 straight sessions after the trading debut,
capital firm. She believes BGI’s soaring
stock price may be a bubble. “A large por-
of history, the making it one of the hottest Chinese stocks
of 2017. The net worth of Wang Jian, the
tion of BGI’s revenue comes from scientific
research [funding]. But its ability to make
company finally 63-year-old co-founder and chairman who
holds 32.5% of BGI shares, reached nearly
[future] profits will lie in new product de-
velopment and commercialization.”
did an IPO this RMB 14 billion ($2.1 billion).
Fueling investor confidence is BGI’s
This is the area where competition is
heating up, which will push down the costs
year, and is top position in a cutting-edge industry with
enormous potential. According to Grand
of genetics services—as well as revenues.
BGI’s future success will hinge on its abil-
looking toward a View Research, a US-based market re-
search company, the global genomics mar-
ity to lead the technology change, and that
is no small challenge.
bright future ket will be worth an estimated $22.1 billion
by 2020. Venture capital has been pouring DNA Superpower
into genetics companies with $1.3 billion BGI is short for Beijing Genomics Institute,
raised globally in 2016. CB Insights, a Ven- the original name of what was a completely
ture capital database service, estimates it state-funded national institute at Peking
was the third consecutive year where more University. Founded in 1999, it led China’s
than $1 billion had been invested. portion of the Human Genome Project, an
BGI offers genetic testing services international scientific research effort to
around the world and boasts a list of big- map, for the first time, the complete genetic
name clients, including the University of makeup of a human being. BGI made only
Oxford and the state-owned China National a modest contribution of 1% to the massive
Tobacco Corp. Last year, it recorded rev- workload, but it provided a jump-start for
enues of RMB 1.7 billion ($261 million), the future company.
with a net profit of RMB 350 million ($54 As funding dried up at the end of the
million), an increase of 28% over the previ- Human Genome Project, the operation
ous year, according to its IPO prospectus. It moved to Hangzhou in 2001 where it began
employs over 5,000 people. to rack up solo achievements. In 2002, BGI
As one of the largest players worldwide published the first draft of the genome of
in genetics, and with a successful IPO be- a rice variety grown widely in Asia. Dur-
hind it, BGI is expected to put more resourc- ing the 2003 SARS epidemic, BGI quickly
es into research to strengthen its position. sequenced the virus and developed a test kit
“BGI is the leader of China’s genom- for fast diagnosis. The company finished
ics industry. With a strong genome data the first complete sequence of an Asian
analysis team, it has established the world’s person in 2007, and then a panda bear in
largest genome sequencing platform,” 2009. In 2010, it sequenced the genome of

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a 4,000-year-old man, dubbed Inuk, whose Science. In 2010, Nature even referred to “[BGI is] the first company in this in-
hair had been preserved in the permafrost the company as a “DNA superpower.” dustry to receive government support,”
of northwestern Greenland. But the company’s hybrid background says Zheng Wei. “In such a regulated in-
Perhaps most impressively, BGI has has also drawn criticism. For instance, Rao dustry, this is a major advantage for BGI,
helped lower the cost of sequencing a hu- Yi, a prominent biologist and Dean at the because it became an early pilot for govern-
man genome from $100 million in 2001 to Peking University School of Life Sciences ment programs.”
$1,000 in 2015. This promises to transform questioned the business ethics of BGI’s Supported or not, BGI is now one of
medicine. “We want to sequence more, leadership. From 2003 to 2007, a key stage the world’s leading providers of gene se-
and understand more about our genome,” of BGI’s expansion, co-founder Yang quencing services and owns about half of
Zhang Gengyun, a BGI Vice President told Huanming ran the company while simul- the world’s gene sequencing machines. In
The Sydney Morning Herald in 2015. “That taneously heading the prestigious Chinese 2010, BGI bought 128 of the world’s fast-
would give us a lot of new knowledge Academy of Sciences in Beijing. est machines from Illumina, a California-
about our health and more insight about “If one person runs two organizations based genomic device developer.
other species. The real idea [is] to expand at the same time, who represents the insti- BGI is also accelerating the process of
knowledge, that’s our top target.” tution’s interests, and who stands for the commercializing research findings and de-
The company moved to an eight-story company profits when there is a conflict?” veloping other new growth areas. In 2012,
former shoe factory in Shenzhen in 2007, Rao Yi wrote on his blog in 2012. “From the company set up BGI Tech, a commer-
and the following year the name officially the 1990s, the government has been pour- cial arm that conducts DNA sequencing and
changed to BGI. The move to one of the ing money into Yang’s gene sequencing protein studies for clients using proprietary
world’s most dynamic economic zones project, did they realize they’re investing in technology. Clients include drugmakers
was part of the effort to reduce government Yang’s private [business]?” seeking cures for diseases and agricultural
influence and help the company become BGI has never responded to the ques- companies engineering new plant varieties
more market-oriented. Since then, BGI has tions of conflict of interest. Indeed, govern- and cloning livestock.
become one of the largest genetic testing ment support still plays a role in the com- Another landmark—and profitable—
firms in the world with its businesses cov- pany’s development. Last year, it received product is BGI’s Non-Invasive Prenatal
ering sequencing for laboratories in institu- subsidies of RMB 34.4 million ($5.3 mil- Testing (NIPT). NIPT screens unborn ba-
tions, as well as genetic sequencing service lion), up 64% from 2015. The company bies for genetic disorders by using fetal
solutions for hospitals. has calculated these subsidies as profits, DNA found in the mother’s bloodstream,
BGI’s academic origins give it cachet according to filings with China Securities unlike previous tests that required the risky
as a private company as it has been able to Regulatory Commission (CSRC). Howev- direct sampling of fetal tissue.
publish research results in the world’s lead- er, the importance of government support
ing scientific journals, such as Nature and goes beyond the monetary. IPO and Beyond
As early as 2014, BGI Tech was reported to
Reproductive Revenue be planning to raise $400 million from an
initial public offering (IPO) in Hong Kong.
A growing proportion of BGI’s revenue is reproductive services
The plan failed as China’s foreign-invest-
ment regulations forbid the use of foreign
capital in “applications and research in hu-
man stem cells, gene diagnosis and treat-
ment,” according to the Catalogue for the
Guidance of Industries for Foreign Invest-
ment released by the State Council.
An IPO was considered essential to pro-
vide funding for ambitious future projects,
including the development of cloud ser-
vice ecosystems and medical service plat-
forms. In July, BGI finally got it right and
the shares were publicly listed. The funds
raised will now help BGI Tech expand in
the market for providing gene sequencing
to large customers.
The successful IPO did not come a mo-
Source: BGI IPO prospectus
ment too soon, as official filings cite fierce

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 Fall 2017

supports that reasoning.”

But the BGISEQ-500, a smaller bench-
BGI has built a group of top-notch top instrument introduced to the market in
2016, has been well-received by experts. It
talents who analyze the data from is running inside BGI’s labs and organiza-
tions like China National GeneBank, a non-
gene sequencing results profit founded by the Chinese government
and BGI in 2016.

Zhou Rongjia Advantage of Experience

Genetics Professor As BGI tries to build an image (read: at-
tract investment) as an innovation-driven
Wuhan University company dedicated to scientific research,
some argue that sequencing is not cutting-
edge enough. A Chinese biochemist Fang
competition as one of the company’s major “We are different from BGI because we Shimin, also known as Fang Zhouzi, said
challenges. A new wave of Chinese com- focus more on developing our instruments in an interview with the South China Morn-
panies is looking to follow the lead of BGI and equipment,” He says. “We aim to pro- ing Post that BGI’s large-scale sequencing
to become global providers of genetics ser- vide more cost-effective and accurate DNA resembled a labor-intensive Henry Ford as-
vices—ironically, many of them have roots sequencing services to hospitals and testers, sembly line.
in BGI. including BGI.” “Although the determination of the hu-
One example is Wang Jun, the beloved On the other hand, it is important to man genome can become a powerful tool
former CEO who quit in 2015 to establish put these advancements into perspective. for genetic research, it doesn’t have much
iCarbonX, a Shenzhen-based medical tech- “Third-generation sequencers… have ad- academic significance,” Fang wrote in a
nology company. Wang, who originally vantages in clinical uses, but it will take a WeChat post in September. “This is not a
trained in artificial intelligence, is using AI while before it’s been applied on a large creative technology at all. The basic work is
techniques in genetic data analysis. scale,” says Zhou from Wuhan University. done through the instrument automatically.”
In more direct competition is Beijing- For investors in BGI, the deeper con- The factory comparison, and implica-
based Novogene, led by BGI’s former Vice cern may be the company’s reliance on for- tion of somewhat low-skilled work, holds
President and bioinformatics expert Li eign equipment suppliers. When Illumina when examining BGI’s employment prac-
Ruiqiang, which claims to have overtaken raised its product price last year, BGI’s tices. In fact, founder Wang Jian deliber-
BGI in gene sequencing capacity. In 2015, profit margin shrank 10%. In response, BGI ately modeled his labs on other factories
Illumina, an equipment supplier to BGI, boosted efforts to develop its own DNA se- in the Pearl River Delta where Shenzhen
chose to partner with Novogene to develop quencing device. is located. The average age of workers is
advanced clinical applications in the fields “BGI took a bold step a few years ago just 27, and data from Jobui, a job search
of reproductive health and cancer research when it bought the American firm Com- website, shows 40% of them make less than
based on next-generation sequencing tech- plete Genomics [for $108 million], which RMB 8,000 ($1,231) per month, a far cry
nology. The move was a blow to BGI. had developed its own DNA sequencing from their counterparts in the US.
There are other newer and scrappier technology,” says Kevin Davies, a geneti- BGI’s facility physically resembles a
competitors as well. Direct Genomics, a cist and author of several genomics books. Chinese factory campus in some ways as
Shenzhen-based startup, released a third- “But the first instrument BGI tried to build well. Beside the office buildings are dor-
generation DNA sequencer, GenoCare, this from that technology—the Revolocity— mitories with two bunk beds in each room.
August. CEO He Jiankui, a Biology Pro- was a failure.” Four people live together, hanging clothes
fessor at South University of Science and The rollout of the Revolocity was on the balcony and playing basketball in the
Technology of China, says the third-gener- halted in November 2015, a move accom- court after work.
ation device will drive human sequencing panied by substantial staff cuts at the US But what those young ”factory work-
costs down to $100 a head. He plans to pro- subsidiary. “The extreme complexities of ers” have built by using the gene sequenc-
duce about 1,000 GenoCare units per year. melding physical, biological and data sci- ing machines has become BGI’s trump
Professor He said the machine can ences is the reason it has been so difficult card: a massive database containing all the
sequence samples of human genomes in for companies to compete with Illumina’s genetic information they have collected and
less than 30 minutes with an accuracy up high-throughput innovations,” Wells Fargo deciphered over the years.
to 99.7%, making it one of the fastest and analyst Tim Evans wrote in a note to inves- “Since participating in the Human Gene
most precise DNA sequencers in the world. tors. “We think the Revolocity’s demise Project, BGI has built a group of top-notch

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Company

talents who analyze the data from gene se-

quencing results. And now it’s the largest
gene sequencing platform,” says Biology The market valuation of BGI is high,
Professor Zhou.
This database is where BGI outclasses mainly because there is much room
its newly-founded rivals, and could yield
enormous returns in the future as a pool of to imagine future developments in the
“Big Data.” Gene sequencing results are
not that helpful until there is a database to
genomics industry
compare them with. In the Non-Invasive
Prenatal Testing, for example, BGI owns
more than two million samples, and it
Zheng Wei
claims an accuracy of 99% in identifying Biotech Analyst, TF Securities
Down Syndrome in unborn children.
BGI is also trying to boost innovation
by partnering with global institutions and term partnership with the Bill & Melinda Although BGI may no longer have the
building international research centers. Gates Foundation focused on projects and uncontested dominance it once held, it still
BGI’s services are now available in more strategies to apply genomic tools to im- has one of the largest sequencing capaci-
than 60 countries and regions, according to prove global health and agricultural devel- ties in the world as well as major scientific
its website, and global expansion is expect- opment. ambitions—including to sequence the ge-
ed to accelerate in the wake of the IPO. Last nomes of one million people, one million
December, a new division, BGI Groups Fearless Ambition plants and animals and one million micro-
USA, was formed and is based in Seattle. China’s genetics testing is one of the fast- bial ecosystems. With its capabilities, BGI
“The new office will help us con- est growing markets in the world and is is in a position to forge the future of DNA
nect those resources with BGI’s interna- expected to expand at a compound annual applications.
tional capabilities and scale to accelerate growth rate of 37% in the next five years “I think BGI has a bright future, par-
global innovation for human health,” said through to 2021, according to a report by ticularly as it pushes into the huge medi-
He Yiwu, CEO of BGI Groups USA and China Investment Consulting Corp. earlier cal and diagnostics market in China,” said
BGI’s Global Head of Research and Devel- this year. The market size should increase Kevin Davies. “As it grows, however,
opment, in a press release. from RMB 13.3 billion ($2 billion) in 2017 BGI must retain the fearless spirit and am-
BGI now has offices in Denmark, Hong to RMB 42 billion ($6.5 billion) by 2021, bition that it has displayed throughout its
Kong, Japan and the US. It also has a long- the firm forecasts. history.”

A researcher in BGI’s plant breeding laboratory

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Big Blue Dances

in the Digital Era

C
ompanies are dying fast these days, killed off by merciless tech disruption, the
Gill Zhou, CMO of IBM fast-paced evolution of consumer taste and, to an extent, a trend toward indus-

Greater China, discusses

trial consolidation. In the 1950s, the average age of a company on the Standard
& Poor’s 500 index was 60 years, now it is less than 20.
how marketing has In particular, the technology industry is riddled with stars that once shined bright,
but failed to keep up. Hewlett-Packard, still among the world’s largest PC makers,
changed in the digital era was dropped from the Dow Jones Industrial Average in 2013. Compaq, which be-
came the youngest-ever firm to reach the Fortune 500 in 1986 no longer exists. And
By Liu Sha how long has it been since you saw a Nokia phone?
International Business Machines (IBM), on the other hand, is still going strong.
“Big Blue,” as it’s famously known, has undertaken many successful transformations
in its history, with its latest focus on cognitive solutions and cloud platforms.
According to Gill Zhou, Vice President and Chief Marketing Officer (CMO) of
IBM’s Greater China Group, now is the worst of times because disruptive innovation
and crossover competition have caused unprecedented challenges, but conversely it
is also best of times in that great opportunities have been generated in this new era of
the digital economy.
The key to survival has been innovation and transformation. While technologi-
cal developments may spring to mind, transformation and innovation in marketing
should be regarded as equally important.
Gill has worked at IBM for over 16 years, and experienced three different CEOs
while being at the center of marketing innovation. She discusses how a marketing
team should coordinate with the company’s overall strategic shifts and how the old
ways of marketing are no longer viable.

Q: IBM breaks the stereotype of tech firms all being young companies. What has
changed for IBM all through these years?
A: IBM’s 106 years of pushing the tech industry forward can be summed up in a
few keywords: history, innovation, transformation, and industry. The first keyword

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Interview

is history, because IBM played an important part in the early de- to the market and the clients. When the whole company started to
velopment of information technology. Many industry players such transition, our target audiences also had to change. Our client profil-
as Nokia (founded in 1865) and Compaq (founded in 1982), have ing would change as well. Previously, CIOs would be recognized as
stumbled hard, but IBM is still going strong. Transformation and key buyer of our products, but now executives, representing a range
innovation have been embedded into the genes of the company. of C-suites, including CEO, CMO, CFO, and CHRO, are targets
The last one, a strong distinguishing feature of IBM, is industry of marketing because they are all key stakeholders in the wave of
expertise. It’s often the case that IBM starts applying new technolo- transformation and digitalization of the corporations within which
gies to real-world problems while others are still experimenting. For they operate. Executives have different pain points and require spe-
example, Alpha-Go made its appearance at the go board only re- cific solutions to solve their business problems, which brings great
cently, while IBM had aligned artificial intelligence (AI) to strategy challenges to marketers, but of course also great opportunities.
games, specifically chess, way back in 1997. Chess is not as compli- The other swift action has been moving to digital platforms,
cated as go, but we nevertheless transitioned through that stage long which are leading the customer journey, so we have become more
ago. Now what we do is apply the latest AI technologies to industry customer-centric. The diversity of the target audience has widened,
and real-life uses. We are using Watson, IBM’s AI computer, to and the customer journey has fundamentally changed in terms of
help advance the healthcare industry, assist in the development of information gathering and purchasing behavior. To find new clients,
blockchain and a variety of Fintech (Financial Technology) appli- we have to go online, to social networking sites and into WeChat
cations. What IBM focuses on now is using these technologies to groups. We’ve moved our information sharing platform from our
service people and industries. official website onto WeChat in fact.
And for a complete picture, we need online records integrated
Q: In recent years, IBM has changed from a supplier of physical IT with offline information. For example, at an offline event, every po-
equipment, to a supplier of digital solutions for companies, which tential client wears a wristband that monitors where they go, at what
are often hosted in the cloud. How has the marketing department booth they stand, and what questions they put to our sales people,
coordinated with that strategy shift? and so on. All this behavioral information can be recorded and sent
A: Reinvention is rooted in IBM’s genes. IBM was formerly consid- to a real-time dashboard.
ered as selling systems hardware. In the past, the company focused So now the campaign design is fully based on the customer
heavily on hardware products which contributed 60% of IBM’s journey. We know what customers are thinking, where they are go-
revenue. Over the past 10 years, the company has changed from ing, and what information they need. We’re now better able to help
an IT hardware supplier to a cognitive solutions and cloud platform customers make the right decision at the right time. Simple product
company. This is a change of business portfolio, and the marketing ads aren’t enough to attract prospects—we present not only product
department is a pioneer in this transition, because we stand close features, but also tailored digital solutions to respond to their indus-
try challenges.
But our journey with the customer doesn’t stop at the purchase
stage. We transform our customer into an IBM advocate, even go-

Over the past 10 ing so far as to co-brand with them to create additional potential in
the relationship.

years, the company Q: Could you explain the changes further? What is the difference
between IBM’s marketing work and that of other tech firms?
A: Many internet firms or startups were born in the digital era.
has changed from an However, being born in the digital era does not mean you are data-
driven. So, the point is not when you start, but whether the way you

IT hardware supplier do your job adapts to current market shifts and the latest data tech-
nologies. The biggest transition for the marketing function of IBM
is becoming completely data-driven.

to a cognitive solutions For example, one of the teams within our organization is called
Product Marketing. It focuses on client needs. It was formerly
known as “Marketing Segment Management” (MSM). It’s obvious

and cloud platform that before the name change, it divided our clients into different
segments and industries—very rough divisions. Now we focus on
the benefits for each client—not only the functions and features re-
company quired by their positions and/or job responsibilities, but also exactly
who they are and what they like. We have to know our clients based
on data collected online and offline. This team has totally changed

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the way they work. We used to make guesses about our clients, but
now our decisions and conclusions are all based on data analytics.
Another team, Performance Marketing, is measured by the
return on marketing investment. Every general manager wants to No matter what
know the ROI of the company’s marketing investment. It is very
challenging for a CMO to prove that their marketing investment has
not been wasted. Now with a data-driven strategy, everything from your model is, to
online clicks and page views to offline behavioral data at events are
recorded in the marketing data warehouse and reported to the com-
pany. Now general managers know how much the marketing team
businesses or to
has contributed to actual business. It’s kind of merciless because the
marketing team’s performance is immediately evident and there’s
no room for excuses and no place to hide, but on the other hand the
consumers, successful
value of marketing also becomes clearer and more self-evident
The changes to how the business operates have a huge impact on
the marketing function positioned in the company. For many years
marketing means you
the marketing function was considered a “cost center,” giving the
impression that we marketing people only spend money and don’t
make any. The marketing job itself was process-driven—market-
managed to touch
ers were measured by the number of news stories published, events
hosted and advertisements placed. This no longer works. Now it is people
all about outcome-driven—that is, marketers are measured by how
much they contribute to the company’s business revenue.
thought I would stay in that system, but I left. I studied English
Q: Most of IBM’s business is targeted at organizations and com- literature and love Shakespeare, but I joined the ICT [information
panies, or B2B, but you’ve been advocating what you call B2B2P communication technology] industry, and worked with engineers
(business to business to people). What exactly is that strategy? and scientists day-in and day-out.
A: Marketing is about winning people. No matter what your model I firmly believe that those who are not adaptive to change and
is, directed at businesses or consumers, successful marketing means transition will not succeed in either life or work. IBM is 106 years
you’ve managed to touch people. So, don’t forget, no matter which old and still very innovative and competitive, and a key reason for
industry you’re in, manufacturing, retailing or healthcare, the ulti- that is it embraces change. IBM Chairman and CEO Ginni Rometty
mate goal is to win people’s hearts. In the digital era, we’re equipped once said that “Comfort and growth do not coexist.” In my career,
with data tools to help us know what people want. But now we also I’ve experienced challenges and ups and downs, yet I still feel very
need to grab their attention in just a few seconds. IBM is a company happy and fulfilled every day.
that sells solutions to organizations. To that end, we used to talk to
our customers about how advanced our products are, about specific Q: You’re hailed on Chinese social media as a model of a working
product features—that’s necessary, but nothing that either surprises mother with a happy family. How do you balance life and work?
or delights our clients. So, we forged some new connections. A: Well, balance is never easy, I would rather say “work and life in-
When people see IBM Watson and Grammy award winner Alex tegration.” In fact, the emerging digital technologies such as mobile
Da Kid collaborate on the song “Not Easy,” and Watson editing and social have made this integration possible for working moth-
the trailer of the thriller movie “Morgan,” it makes them wonder, ers like myself and many others. For example, I can do my online
“Wow, how can AI be connected with the entertainment industry?” grocery shopping for the family while taking conference calls at the
These fresh marketing angles make people think, “What’s going same time. Technologies have made our lives, private and profes-
on? Why IBM?” Then they start to dig into more about IBM and sional, much easier these days.
Watson—what AI can really do to help make the world work better. I also spend quality time with my loved ones, even if I can’t
For marketers, this is a moment of truth, because we are developing afford being available all the time. Quality time means whenever
content that is attractive and relevant to end users. they need you most—for example, during the first week of my
son’s college life in the US. I stayed close to him, taking care of all
Q: On many occasions, you’ve talked about “crossover” in both his needs, small or big, but more to encourage him to build his
work and personal life. How is crossover related to your personal confidence in starting a brand-new life of his own in a brand-new
experience? country. To him, I am his mother, but also like a friend or “soul
A: Crossover means change, exploration and progression. I’ve been mate” who he can always go to for advice and support whenever
used to changes all my life. I used to be in a military school. People he needs to.

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Downtime Fall 2017

China Moves
to the Beat

China’s popular music

industry may finally
be poised to break
through internationally
By Erica Martin
Image by AMAO

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Downtime

T
here is no definitive answer to the Phonographic Industry (IFPI), China was to ads, which ensures that Tencent con-
question, “Which is China’s most the 12th largest market in 2016, with $202 tinues to rake in profits. Apple Music, by
popular band?” But TF Boys are a million in revenue compared to the US’s comparison, claims upwards of 17 million
solid candidate. number-one ranking of $5.3 billion. The subscribers, but has yet to turn a profit. Spo-
The wholesome trio of teenagers have figures include physical sales, digital sales, tify lost $581.4 million in 2016—more than
garnered legions of fans—over 60 million performance rights and licensing, but not double the losses of $241.6 million in the
across several official accounts on Weibo, concert ticket sales. previous year—despite its 140 million ac-
China’s Twitter. And with their squeaky- But there are important differences in tive users, of which more than 50 million
clean aesthetic and pro-Communist Party the way music is consumed that may give are paid subscribers.
lyrics, they have earned approval from the China a business edge. Combined with the “We are educating people to accept
Ministry of Culture in the form of both growing popularity of some up-and-com- that content has a value and we are mak-
funding and sanctioned appearances on ing stars, China may soon be on the inter- ing progress,” Andy Ng, Tencent Music
state television. national music map. Entertainment Group Vice President, told
But despite their popularity at home, One of the most interesting divergenc- IFPI. “Young people are in particular more
TFBoys—meaning “The Fighting Boys”, es between China and the three highest- willing to pay for a music service; they are
as from a “Fight! Fight! Fight!” chant ranking countries in terms of global music happy to spend a few dollars supporting the
one might cheer at an American football revenue in 2016, is the way that revenue is artists they truly admire.”
match—would seem to have little chance split between digital and physical releases. Shifting Chinese music consumers
of winning over international audiences. Despite seeming an underdeveloped music away from piracy has been a tough task, as
Their sugary-sweet personas and willing- market, China stands out in terms of how it is baked into the modern culture in Chi-
ness to pander to the state clash with West- money is generated compared to the top na—which is one of the reasons the world’s
ern associations between music and rebel- three. IFPI reports that in the US, digital re- most populous nation still has a compara-
lion or counterculture, as evidenced by the leases account for a healthy 70% revenue, tively small music market. In the late 1980s
bemused tone with which publications like versus 18% for physical records. The UK in and early 1990s when the mainland pop
the New York Times write about the band: the third spot is 47% digital and 32% physi- music scene was born, there were no la-
“TFBoys display no signs of youthful re- cal. Japan has higher revenue of physical bels to speak of and bootleg tapes ruled the
bellion. They decidedly do not walk on the releases at 73%. scene. Then came the MP3—music as digi-
wild side.” China, on the other hand, reaps a whop- tal files—revolution and China embraced
However, other Chinese acts are emerg- ping 96% of its music revenue from digi- the change faster and more thoroughly than
ing which, while much smaller than main- tal releases, with over 75% of that number anywhere else on the planet.
stream performers, are knocking on the coming from streaming sales. While still But against the odds two major home-
door of international fame. ACrush, a band only a sliver of the global market, China grown labels emerged: Modern Sky, who
of five androgynous women with a devoted has adjusted to the digital future of music manage the likes of Edison Chen, a Hong
female fanbase who refer to the boyish stars more quickly than other countries. Kong actor, musician and entrepreneur,
adoringly and ironically as “husbands,” has The campaign toward digitalization is and Maybe Mars, who have classic Beijing
far greater crossover appeal—and are gen- being led by internet giant Tencent, which bands like indie rock trio Carsick Cars on
erating more interest internationally than dominates the market with a 70% share, their roster. The exploding popularity of
domestically, at least in terms of media according to The Economist. Owner of streaming has been both a blessing and a
coverage. streaming service QQ Music, which has curse for Chinese record labels.
Another is Higher Brothers, a rap group 400 million daily active users, Tencent has “Streaming affected many parts of
out of Chengdu in China’s southwest. Over tightened its grip this past year by acquiring Maybe Mars,” says Yang Haisong, the la-
the past year, this intense-but-humorous competitors Kuwo and Kugou, and inked li- bel’s CEO and the frontman of the highly
bunch has seized the attention of rappers censing deals with Universal Music Group, influential Chinese post-punk band P.K.14,
in Korea and the United States resulting in Sony Music and Warner Music Group for formed in 1997. “The good part is that the
several collaborations, in addition to gain- exclusive streaming rights. bands and musicians can easily gain more
ing a devoted following in China. With this power, Tencent is pouring fans and audiences, but the bad part is we
resources into combating music piracy and have to work much harder on physical
Stream On conditioning the Chinese public to pay for sales.”
In theory, the world’s most populous coun- digital tunes. QQ Music’s number of pay- Labels have instead turned to tours and
try has the potential to become the world’s ing monthly subscribers is relatively low at festival shows to promote the acts and gain
most profitable music market—and yet it 10 million, but an increasing number of us- an audience, which in turn leads young
is far away from that. According to a re- ers are paying to stream individual tracks. people to seek the bands out via streaming.
port by the International Federation of the Other users listen for free but are exposed And those live performances have them-

64 / CKGSB Knowledge 2017

 Fall 2017

It has recently begun collaborating with

other major festivals across the US and Eu-
rope.
“A main goal with overseas festivals
from the beginning was to provide a larger
platform for our bands to reach Western
music fans,” says Michael LoJudice, the
head of Modern Sky’s US operation. “I do
feel, at our end, that a few artists are being
provided with the right resources to reach a
Concert goers at Ultra Music Festival in Shanghai this year wider audience.”
At the same time, Western labels are
selves become a major revenue source. and Television (SARFT) studies the lyrics beginning to sign Chinese acts and market
“Most of the revenue generated by any of songs and approves every record before them overseas. The most notable example
artist in China is from live performanc- it receives distribution rights. Those who is 88rising, which was founded in 2015 by
es,” says Dave Luce, founder of SHFT, a toe the line make it on state-sanctioned tal- Sean Miyashiro, co-founder of Vice Me-
Shanghai-based music promotion company ent shows and other televised performanc- dia’s electronic music platform Thump,
focused on hip-hop. es, and so get an undeniable edge from the with the specific goal of giving Asian hip-
There were over 200 domestic pop mu- visibility. A band that causes too much con- hop artists a Western platform. The label is
sic festivals across China in 2016. One of troversy can see their distribution rights lost behind Indonesian viral rap sensation Rich
the biggest and most longstanding is Mod- and performance permits revoked. Chigga, and more recently has cultivated
ern Sky’s Strawberry Festival, which annu- “We’ve never had a problem with [cen- a healthy online following for its rap act,
ally brings a mix of high profile Western sorship],” says Luce, “but the artists that Higher Brothers.
and Chinese rock and electronic music acts I’m working with are careful about what The ascent is still gradual, however:
to 12 cities across the nation. With ticket they’re saying. Nobody’s rapping about Miyashiro asserts that he’s putting together
prices of RMB 599 ($91) and up, it is easy politics or drug use.” a US tour for Higher Brothers, but for the
to understand how it is making money. What happens far more often than lyric moment, they’ve never played outside of
censorship is rejected permits and cancel- China.
Support with Strings Attached lations of live shows, especially large-scale Campbell agrees that the crossover po-
A special feature of the mainland China festivals. Campbell points out this has been tential lies in the indie/underground sector.
music scene is that the government has a occurring with increased frequency over “They are playing music with clear roots
substantial stake in it—not for money, but the last five years. The Strawberry Festival outside China,” he says. “They are eager
for soft power. The 13th Five Year Plan, was pushed out of its original home in Bei- to engage with artists and audiences in the
with goals set for 2020, vows to make cul- jing, while Phoenix Burn, China’s answer West.”
tural exports a pillar of the national econo- to Burning Man, was canceled outright in The differences between TF Boys
my. But it is tough to say what exactly that 2016—only a week in advance. and more underground bands reflects this.
means for Chinese music. Rejection can cut both ways, however, While TF Boys enjoy mainstream mega-
“I’m all for it in principle,” says Jona- especially in youth-oriented popular music. stardom by embodying uniquely Chinese
than Campbell, who chronicled the birth “I don’t like Maybe Mars to be part of any values and pandering to the state, more un-
of Chinese popular music in the book Red government plan,” Yang says firmly. “To derground musicians are making the effort
Rock: The Long, Strange March of Chi- my understanding, the policy of the under- to gain an overseas following. If anyone
nese Rock & Roll, citing the positive ef- ground scene is that if you stay indepen- can achieve both domestic and internation-
fects of government funding for the arts dent longer, you’ll stay stronger to face the al fame, it may be an act like Higher Broth-
in Western nations such as Canada. For mainstream scene in the future.” ers—their lyrics can be anti-establishment,
China, however, he thinks support will be but in a tongue-in-cheek manner, such as
carefully limited to certain acts. “In recent Poised for a Breakthrough in tracks like “Made in China,” in which
years, the direction that things are taking For independent acts that may not adhere to they simultaneously mock and honor their
generally in China signals a shift far from the party line enough to receive the govern- heritage.
anything remotely oppositional or non- ment support reserved for the likes of TF “Higher Brothers is representing China,
mainstream.” Boys, international markets are a natural and we want to continue putting Asia on the
In such an atmosphere, individual art- alternative. Modern Sky, for instance, has map,” MasiWei of Higher Brothers told
ists must be cautious. The State Adminis- been putting on a Modern Sky Festival in Paper magazine. “Our focus is to make
tration of Press, Publication, Radio, Film Central Park in New York City since 2014. music for the world.”

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China Data

Sofa Sportsmen
About 560 million
people in China play
online games, and
of those an elite
1,001 have become
professional “e-sports”
players. China makes
up 57% of the global
e-sports audience,
viewing 3.5 billion
hours of e-sports
videos last years. At
$24.4 billion, China’s
video game market is
the world’s largest.
The stats you need to know

Source: South China Morning Post

At Your Service
From 2012 to 2016, China’s service sector employment grew by 60.67 million,
while employment in agriculture and in the secondary sector fell by 42.8 million
and 8.91 million respectively. In 2016 the service sector accounted for 337.6
million total jobs, 43.5% of China’s total 776-million-strong workforce.

Virtual Venture
In the first half of the
year, 65 “initial coin
offerings,” that is sales
of cryptocurrency by
firms for the purpose of
fundraising, attracted
$396 million from
105,000 investors in
China. However, China
banned the practice
in September amid a
Source: Caixin wider cryptocurrency
crackdown and has
required many companies
Core Technology Source: Caixin
to refund investments.

Scientists at China’s fusion reactor, the Experimental Advanced

Superconducting Tokamak facility, in the central city of Hefei set a new
fusion record in July. The team generated temperatures more than three
times that of the sun’s core for more than 100 seconds, more than double
the previous time at the facility.

Source: South China Morning Post

Stalled Migration
After a battle against capital flight, China’s capital flows ran a $16 billion surplus
in the first half of the year, as compared with a $417 billion deficit in 2016. Foreign
exchange reserves rose for a sixth straight month in July, up $80 billion from
January’s five-year low.

66 / CKGSB Knowledge 2017

Source: Financial Times
 Investing in Children
Chinese online English learning company VIPKid,
which connects Chinese students with teachers
in North America, was valued at more than $1.5
billion in a round of funding from investors
including Sequoia Capital China, Tencent and Jack
Ma’s Yunfeng Capital.

Source: Bloomberg

Building an Economy
Fixed-asset investment contributed 45% to China’s GDP last year, by far the highest share of any
major economy. (For comparison, the US share is 22%, while Japan’s is 30%.) The infrastructure
share of overall fixed-asset investment hit 21.4% in the year to July, the highest on record.
Dirty Money
International sewage and
water treatment firms are
Source: Financial Times set to chase big opportunities
in environmental cleanup in
China. China pledged to lay
126,000 kilometers of new
sewage pipes by 2020, enough
to circle the globe three times,
and raise urban wastewater
treatment by 50 million cubic
meters a day, equal to 20,000
Olympic-size pools. China’s
annual environmental spend
is estimated at RMB 3 trillion
($441 billion) over the next five
years.
Source: Reuters

Green Dragon
According to China’s National Bureau of Statistics, the Middle
Kingdom accounts for about half of world’s legal cannabis
cultivation, which is used in textiles and pharmaceuticals.
For farmers, the famed cash crop can bring in more than
RMB 10,000 ($1,500) per hectare, as compared to just a few
thousand RMB for common grains.

RoboShop
F5 Future Store, a Guangzhou-based convenience store that
features no human staff, raised $4.4 million from venture
capital fund Sinovation Ventures. It plans to open 30-50 stores
in the second half of the year.

Source: Caixin

Source: South China Morning Post

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Snapshot

Xiong’an New Area

What is China’s newest special economic zone?
On April 1st, 2017, the Chinese government surprise announced the formation of a new special
economic and development zone: the Xiong’an New Area. About 60 miles southwest of Beijing, in
Hebei province, the area will combine the now relatively rural counties of Rongcheng, Anxin and Xiong.
With an expected investment of $583 billion over the next 20 years in infrastructure alone (according
to UBS), Xiong’an is set to transform from a largely agricultural and low-tech manufacturing region,
into a high-tech, environmentally sustainable modern metropolis. It will also, according to the plan,
alleviate some population pressures from Beijing while serving as a destination for some administrative
departments, logistics bases and so on. Although still early days, there are big hopes for the project,
which has attracted much attention, including property speculation.

The Region Before Xiong’an

An Xin
GDP: RMB >4 billion
Population: 260,000
Industries: metals, shoemaking, tourism

Rong Cheng
Beijing GDP: RMB 5.94 billion
Population: 390,000
Tianjin Industries: machinery, auto parts, textiles

Xiong
GDP: RMB 10.1 billion
Population: 380,000
Industries: plastic, latex, electrical cables
Source: China Daily, The Guardian, South China Morning Post, Caixin
 Xiong’an Planned Development

Science

Transportation
Hebei provincial authorities will spend RMB 600 billion ($91 billion) on transportation
infrastructure by 2020. Four high-speed train lines will run through the New Area, including
one that already connects Xiong’an to Beijing. Nearby Shijiazhuang Zhengding International
Airport plans to build a Xiong’an terminal, where passengers will have shuttle access to the
 science and technology park is planned
A airport. Two canals may also connect Xiong’an to Beijing and Tianjin.
to be constructed in the New Area, and
300,000-500,000 of Beijing’s most talented
residents will be relocated.
Green Development
Xiong’an is planned to be a “green
5G city,” powered predominately by
renewable and lower-carbon energy
sources. Xiong’an already uses local
geothermal resources, and surveys
indicate an energy equivalent to 2.2
million tons of coal can be extracted
annually. Sinopec is also investing
RMB 34.4 billion ($5.2 billion) in a
China Mobile, Unicom, and Telecom will test Education gas pipeline project that will power
Xiong’an with natural gas.
a new generation of mobile internet service Elite institutions are flocking to Xiong’an.
in Xiong’an. Beijing University of Posts and Peking University will build a campus of the
Telecommunications will build a 5G telecom Guanghua School of Management there, and
network research center. Tsinghua’s Science and Engineering School
has announced intentions to invest. Beihai
Kindergarten and other top public schools from
Ship building Beijing will open campuses in Xiong’an.

Differing Views
The announcement of Xiong’an created instant excitement, prompting a horde of
speculators to descend on the area, causing property prices to triple overnight. But the
 hina Shipbuilding Industry Corporation,
C key word is “speculate”—Xiong’an is intended to be a replication of Shenzhen, which
China’s largest shipbuilding company, will move went from fishing village to high-tech megacity, but there are many sceptics.
their headquarters to Xiong’an.

“Whether the zone will work depends on the purpose of setting it [up]... If the purpose is related
to innovation or the creation of a new type of economy, then from the experience and lessons
Medicine all over the world we know that… only emerges through market mechanisms, not planning.”
- Xu Chenggang, Professor of Economics at CKGSB,
and winner of the 2016 China Economics Prize

“The government has pointed to Shenzhen [as a success case]… Yet there are also plenty of
new areas—notably, Binhai in Tianjin, just east of Xiongan—that have failed to take root.”
– The Economist

P eking University is planning a medical “It is easy to set up new area, but tough to sustain its growth.”
research center in Xiong’an that will specialize – Li Zuojun, Fellow, Development Research Center of the State Council
in integrated teaching, scientific research and
medical services. “In our view, the Xiong’an New Area is designed to address some specific issues that Beijing
faces and it does not herald another round of massive infrastructure build out in China.”
- Bank of America Merrill Lynch
Bookshelf

Reading China’s Economy

George Magnus shares his favorite books on China

My first recommendation is The

Scramble for China: Foreign Devils in
the Qing Empire, 1832-1914, by Robert
Bickers. The book is about how foreigners
carved China up in the 19th century, the
previous period of globalization. I like it
because there is a resonance with today’s
globalization, which has a very different
context in that China is beneficiary
and instigator. It helps you understand
China’s view on the world.
Unlikely Partners, by Julian Gewirtz,
details how China opened up intellectually
to foreign economic thinking, which is a
story that is not understood well. Even
before Deng Xiaoping came to power,
there was a new willingness to look at
what other countries were doing. After
the Berlin Wall fell, the engagement
deepened, and people like Milton
Frieman and Walter Mandell, were
welcomed to China. China didn’t copy
everything, but took what they thought
would work for them.
For those newer to China, The Chinese
Economy: Transitions and Growth,
George Magnus is an economist and commentator, as well
by Barry Naughton, is a classic book
as an Associate at the China Centre, Oxford University.
for anyone that wants to get to grips
He formerly worked at UBS Investment Bank, as Chief
with the Chinese economy as it evolved
Economist, and then later as Senior Economic Advisor. He
and developed during the early days of
is author of The Age of Ageing, on the global influence
People’s Republic. It covers it very well,
of demographic change, and Uprising, on the impact of
and the narrative to reform and opening
emerging markets in the world economy. He is currently
up is essential reading for any economics
working on a third book on China’s debt problems.
or finance student.

Why the West Rules— Stabilizing an What is History? A Short History of On China
For Now Unstable Economy by E.H. Carr Financial Euphoria by Henry Kissinger
by Ian Morris by Hyman Minsky by John Kenneth Galbraith

70 / CKGSB Knowledge 2017

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