Vol.1, Issue I, Spring 2013 by ChinaHands

China hands Vol. I Issue I | spring 2013

Yale College’s premier magazine on US-China relations

from angola to zambia Sino-African Relations in Light of China’s Rebalancing

the big red scapegoat Insight, 10

The role of foreign banks in china Feature, 16

China’s Impending Thirst Feature, 24

klaus kleinfeld ceo of alcoa Interview, 32

China Hands Magazine |

Words from the Magazine Advisor Dear Readers, Today, America and China are interconnected as never before. In the recent presidential elections, both President Barack Obama and Governor Mitt Romney singled out the supposed undervaluation of the Chinese Yuan as a key campaign issue. Their argument is tantalizingly simple: the US merchandise trade deficit has averaged a record 4.4% of GDP since 2005 and that has resulted in millions of jobs being shipped out of America. With China accounting for 35% of that shortfall, there can be little doubt as to the source of the problem and the key role a so-called manipulated currency plays in shaping the outcome. This reasoning resonates with the US public. Opinion polls conducted in 2011 found that fully 61% of Americans believes that China represents a serious economic threat. However appealing this logic may appear to be, it is wrong. Due to its unprecedented saving shortfall, America runs a multilateral trade deficit with 98 countries, while China has allowed the Yuan to appreciate 32% against the dollar since mid-2005. Rather than vilifying China as a principal economic threat to America, the relationship should be recast as an op-

| Issue I Volume I Spring 2013

portunity for America to grow alongside China. With China being America’s third largest and most rapidly growing export market, the US is well primed to take advantage of the emerging Chinese consumer. There is also enormous scope for America’s global services companies to expand in China, given that China’s service sector is relatively small and likely to be growing rapidly in the years ahead. The psychology of fear mongering over China is a very real threat to America’s own prosperity and long-term growth. And the root of that fear lies in a lack of understanding of China and its impressive growth in the past thirty years. We need a new generation of China watchers in America who understand the significance of China’s recent leadership transition, the importance of its ongoing urbanization, and the urgency of its pivot away from an investment- and export-driven economy towards a pro consumption model. While far from perfect, there are many aspects of Chinese economic management that we in the West can learn from, especially a focus on stability and strategy. This is what I attempt to teach in my class at Yale, “The Next China.” Only by looking at China from both sides of the coin can we realize that China’s rise brings not

just challenges, but also tremendous opportunities to the United States. It is important to broaden the base of this dialog in college communities such as Yale. I am very supportive of the role that “China Hands” can play in bridging the communication gap between students in America and China. In fact, several contributors to the inaugural issue of this magazine were previously students of mine in “The Next China.” The articles selected reflected various dimensions of the US-China relationship and many issues that are associated with China’s meteoric rise. They include insightful analysis on China’s impending water crisis, the entry of foreign banks into the Chinese financial system, the rise of a China lobby in Congress, the growing China-Africa relationship, and the future of American manufacturing in the face of Chinese competition. I enjoyed reading these articles, and I hope you too will enjoy “China Hands.” Stephen Roach Advisor China Hands

Words from the Editors Dear Readers, The US-China relationship is widely recognized as the most important bilateral relationship in the 21st century. Both countries dominate the world in terms of economic output, military spending, and even in carbon emission. In particular, the meteoric rise of China in the past few decades—which has lifted over 600 million people out of poverty and propelled China to become the world’s second largest economy after the US—ranks among the most important world developments in history. In fact, China recently overtook the US as the world’s leading trading partner and is expected to overtake Canada as America’s top trading partner in the coming years. Not surprisingly, China received considerable attention during the 2012 presidential campaign. President Obama urged China to play by the rules while Governor Romney pledged to label China as a currency manipulator on his first day in office. Nonetheless, not everyone agrees that China is a threat. Stephen Roach, our magazine advisor and former Chairman of Morgan Stanley Asia, argues that America’s problems are not caused by China and that China’s rise presents tremendous opportunities for America’s economic recovery and future prosperity. Economics aside, America and China have to cooperate to solve the world’s most urgent problems, whether it is nuclear proliferation or climate change. Given the stakes involved, it is essential that America treat China as a reliable partner and responsible stakeholder so as to promote win-win benefits and geopolitical stability. In the words of new Secretary of State John Kerry, “the simple fact is that we need China, and China needs us. We have to get this relationship right.”

There are promising signs of increased dialogue and exchange of ideas between the two nations. On the international level, the annual US-China Strategic and Economic Dialogue was set up by Presidents Obama and Hu Jintao in 2009. But the next generation of leaders from both countries also needs to understand each other better. As students at Yale College, we have sensed the increased interest in China on campus over the past few years, exemplified by the increased number of classes on China and record number of students learning Mandarin Chinese. But the dearth of any student publications on China means that students lack a platform to discuss China-related issues and US-China relations. This inspired us to start this magazine—“China Hands.” “China Hands” was originally a term for 19th century merchants in the treaty ports of China, but gradually evolved to reflect anyone with an expert knowledge of the language, culture, and people of China. By naming our magazine “China Hands,” we strive to deliver the most insightful and perceptive stories about China and help you, the reader, become the next generation of “China Hands.” In this first issue of the magazine, we aim to address some of the key issues relating to China’s development and its relationship with the rest of the world. The magazine starts with a timeline of important events in China and US-China relations over the past year. We then discuss the growing complexities of China’s relationship with the international community. A Feature discusses the need for a stronger China lobby in Congress to mitigate the volatility of US-China relations. Another Feature examines the future of Sino-African relations as China moves

away from an export-led and manufacturing-driven model. An Insight investigates the feasibility of an economic union between China and its regional neighbors, Japan and South Korea. Moving onto discussions about China’s growing domestic market, a Feature argues for the need for increased competition in China’s financial system through foreign banks. An Insight considers the future of the US manufacturing industry given the competition from Chinese manufacturers. Another Insight describes how some foreign multinationals have successfully adapted to the Chinese market. China’s economic rise is not without its problems. A Feature discusses the reforms that are necessary should China wish to avoid an impending water crisis. Finally, we sat down for an interview with Klaus Kleinfeld, CEO and Chairman of Alcoa, the world’s leading producer of primary and fabricated aluminum, to talk about his outlook for the world aluminum industry and his strategies for entering the Chinese market. Napoleon Bonaparte once remarked, “Let China sleep, for when she wakes, she will shake the world.” With the world becoming increasingly interconnected and globalized, it is imperative that we understand a country that represents one-sixth of humanity and one of the world’s oldest civilizations. We hope that you enjoy the articles in the first issue of our magazine, and encourage you to contribute to the betterment of US-China relations in the future. David Yin, Yingqi Tan Editors-in-Chief China Hands

China Hands |

production team ADVISOR

Stephen Roach

EDITORS-IN-CHIEF David Yin Yingqi Tan

MANAGING EDITOR Dilong Sun

ASSOCIATE EDITORS Sandy Jin Kevin Tan

ARTISTIC DIRECTOR Michelle Leanne Korte

LAYOUT editor Yafeng Gao

BUSINESS MANAGER Kenan Jia

CONTRIBUTORS Manuel Martinez Dennis Wang Samuel Kim Kyle Hutzler Teddy Miller Sihan Chen Geyue Yang

Want to write for China Hands? Want to contribute to the China Hands team? Want to place an ad in China Hands? Contact us at chinahandsmagazine@gmail.com The contents of this magazine are copyright of China Hands and may not be reproduced without express written consent. The opinions expressed by contributors to China Hands do not necessarily reflect those of its advisor, staff, or sponsors. China Hands would like to thank China Economic Forum, Alcoa, and Yale-China Association for their support of this publication.

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Table of Contents

Volume I Issue I February 2013

Timeline

6 China: A Year in Review, January 2012 – January 2013 By Dilong Sun

Insights

10 The Big Red Scapegoat: The Decline in American Manufacturing, Politicization of Chinese Involvement, and Real Potential Solutions

By Teddy Miller

12 The Art of Adaptation By Sihan Chen

14 Northeast Asia: Interdependence Without Integration By Sandy Jin

Features

16 The Role of Foreign Banks in Consumer Led China:

The Need for Increased Competition By Manuel Martinez

20 From Angola to Zambia: Sino-African Relations

in Light of China’s Rebalancing

By Dennis Wang

24 China’s Impending Thirst: How the Water Crisis

Might Stop the China Miracle By Samuel Kim

29 Does America Need a Stronger China Lobby? By Kyle Hutzler

Interview

32 Klaus Kleinfeld, CEO and Chairman of Alcoa By David Yin and Yingqi Tan

China Hands |

China: A Year in Review January 2012 – January 2013 By Dilong Sun, with contributions from Sandy Jin and Kevin Tan Jan 6 China’s government

Mar 3 Chinese forces intercepted two Vietnamese fishing boats near the disputed Paracel islands. The Chinese then demanded 70,000 yuan ($11,000) for the release of the 21 fishermen.

bowed to a vocal online campaign for a change in the way air quality is measured in Beijing, one of the world’s most polluted cities. The Beijing Environmental Bureau said it would provide hourly updates of PM2.5 measure ahead of the Lunar New Year, which starts on January 23, in response to the flood of public anger.

Feb China increased access to US films from 20 to 34 per year, but only if the additional 14 are shown in 3D or large format. met with Xi Jinping, China’s vice president. Xi is expected to become the next leader of China.

itary spending would top $100 billion in 2012, a double-digit increase on the previous year. This figure marks a slowdown from 2011 when spending rose by 12.7%.

Jan.13 Scuffles halt China iPhone sales

Feb 14 Chinese Premier

Mar 5 China lowered its

Feb 8, Reports circulated

that Wang Lijun, the deputy mayor overseeing security in Chongqing, may have tried to defect to the US. He was reportedly arrested in Chengdu and flown to Beijing for questioning.

Feb China swung into a

huge trade deficit of $31.48 billion this month, as the West’s economic troubles hit its export-driven economy.

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Feb 14 President Obama

Wen Jiabao said his country was ready to increase its participation in efforts to resolve Europe’s debt crisis, after meeting EU president Herman Van Rompuy and European Commission president Jose Manuel Barroso in Beijing.

Feb 29 The Philippines said

it would push ahead with plans to expand oil and gas exploration in waters also claimed by China, as it brushed off a fresh Chinese warning.

Mar 4 China said its mil-

growth target to 7.5%.

Mar 13 Japan said it had

won approval from Beijing to buy Chinese government bonds for the first time, in a move aimed at binding Asia’s two biggest economies and traditional rivals closer together.

Mar 13 Japan, the EU, and

the US brought a case to the World Trade Organization (WTO,) alleging that China was exporting too little of tungsten, molybdenum and 17 other rare earth elements.

China: A Year in Review

timeline

Apr 9 China’s Supreme

Mar 14 China’s national legislature enacted new safeguards for criminal suspects in amendments for the revised Criminal Procedure Law. The legislature upheld the right of police to hold certain suspects in secret residential locations for up to 6 months. Nearly 8% of the delegates abstained or voted against the legislation.

Mar 15 Bo Xilai, the Communist Party secretary in Chongqing, was removed from his post. Critics had said his anti-corruption policies had parallels with the Cultural Revolution that gripped China from 1966 to 1976. Apr 4 China’s state media

reported that Premier Wen Jiabao has called for the break-up of a banking “monopoly” on lending that has squeezed private businesses as the global economy slows down.

People’s Court clarified and tightened rules on forced land expropriations in a bid to “protect the public interest and guarantee the legitimate rights and interests of expropriated home owners.”

Apr 10 China announced that Bo Xilai was being suspended from the Communist Party’s Politburo and Central Committee, and that his wife, Gu Kailai, was a suspect in the death of Briton Neil Heywood in November 2011. Apr 10 A Filipino warship

found Chinese fishing boats inside the Scarborough shoal with an illegal haul of giant clams, coral, and live sharks. Two Chinese civilian patrol boats blocked the mouth of the shoal to stop the Philippines navy from arresting the fishermen.

Apr 22 The blind Chinese

lawyer, Chen Guangcheng, one of the country’s bestknown rights activists, made a daring escape from house arrest in Shandong province. By the end of the week, he recorded a video detailing the abuse he and his family have suffered and expressed serious concerns for his wife and young son, who were still being held at the family’s home. Chen reportedly found refuge in the US Embassy.

Apr 23 Chinese state media reported that Guangdong party authorities have punished eight Wukan officials, including the previous Communist Party chief, for corruption following a three month inquiry, after their land grabs sparked an unprecedented uprising. May 6 Chen Guangcheng,

isolated in a Beijing hospital, appealed for official help to leave the country after a US-brokered diplomatic solution paved the way for his departure. Chen was offered a fellowship from New York University. China Hands |

timeline China: A Year in Review

June 28 China is planning

to set up a special zone to experiment with the yuan’s convertibility, an attempt to liberalize its capital markets

May 8 Qatar-based Al-Ja-

May 18 Lai Changxing was

zeera said it has shut down its English-language bureau in China after its correspondent became the first foreign journalist to be expelled from the country since 1998. Beijing’s refusal to renew the visa of US citizen Melissa Chan sparked anger among press groups, which linked the decision to a documentary by the international news channel on forced prison labor in China.

convicted and sentenced by the Intermediate People’s Court in Xiamen, the port city which was also his base. On top of the life sentence for smuggling and a concurrent 15-year sentence for bribery, the court ordered all of Lai’s personal property seized. The court’s verdict said the operation totaled $3.3 billion, and that Lai had bribed 64 officials between 1996 and 1999.

May 8 A North Korean boat

May 28 Chinese state media

hijacked three boats with 29 Chinese fishermen on board and demanded 1.2 million yuan ($190,000) for their release. The fishermen were freed on May 20 after being held for 13 days.

May 9 The United States

opened its banking market to China’s biggest bank ICBC, for the first time clearing a takeover of a US bank by a Chinese state-controlled company.

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reported that former railways minister Liu Zhijun will face prosecution for alleged corruption, following reports he took bribes of more than 800 million yuan ($127 million.) The Communist Party’s disciplinary watchdog said it had expelled Liu Zhijun from the Party and handed his case to judicial authorities.

June 7 China cut key inter-

est rates to boost growth. The benchmark one-year loan rate was cut by a quarter of one percent to 6.31% while deposit rates were cut from 3.5% to 3.25%.

June 30 Hong Kong marked

15 years since Chinese handover .

July 1 Apple settled China

iPad case for $60m. Chinese firm Proview agreed to settle the dispute involving rights to the “iPad” name.

july 3 Chinese officials have halted the construction of a copper alloy plant in Sichuan province following violent protests by local residents.

July 19 China pledged

$20bn in credit for Africa over the next three years, in a push for closer ties and increased trade.

August 1 Chen Guangcheng,

who arrived in the US in May, urged Washington to investigate his case and protect his family in China.

August 14 A senior aide to

Syria’s President Bashar al-Assad flew to China for talks on the crisis.

China: A Year in Review

August 19 Anti-Japanese

protests erupted in cities across China after Japanese nationalists raised their country’s flag on disputed Diaoyu/Senkaku islands.

September 8 The Hong Kong government backed down over plans to make schoolchildren take Chinese patriotism classes, after weeks of protests.

September 17 Some of Ja-

pan’s biggest firms have suspended operations at some factories in China as safety concerns grow amid violent anti-Japan protests.

September 25 China’s first

aircraft carrier entered into service.

October 3 A Chinese-owned firm in the US is suing President Barack Obama after he blocked a wind farm deal on national security grounds. October 7 Thousands of

factory workers at Foxconn went on strike to protest their working conditions on the iPhone 5’s production lines.

Timeline

December 18 The World

October 18 A US govern-

ment security review found no evidence of spying by Chinese telecoms equipment firm Huawei Technology.

November 8 Chinese

President Hu Jintao opened a Communist Party congress that began a once-ina-decade power transfer with a stark warning on corruption.

November 15 Xi Jinping

Bank raised its growth forecast for China, saying stimulus measures and approval of infrastructure projects would help boost growth.

December 28 China tight-

ened its rules on internet usage to enforce a previous requirement that users fully identify themselves to service providers.

january 7 Chinese journal-

was confirmed as the man to lead China for the next decade.

ists working for Southern Weekend participated in a rare protest against censorship.

November 25 China success-

January 12 Death toll from

fully landed a jet fighter on its new aircraft carrier for the first time.

December 13 Japan scram-

bled fighter jets after Chinese plane were seen near disputed islands.

a landslide in China rose to 46 .

January 18 China’s economy reported signs of a rebound that could help it emerge from its worst economic growth period in 13 years.

Dilong Sun is sophomore in Pierson College, Yale University, majoring in Ethics, Politics, and Economics. He serves as Vice President of the Chinese Undergraduate Students at Yale and has previously worked at the Forbidden City in Beijing and the British School of Athen on Chinese and ancient Greek art. He is also strongly interested in the Spanish-speaking world, with special focus on the interaction between markets and society in South America. Contact him at dilong.sun@yale.edu. China Hands |

The Big Red Scapegoat The Decline in American Manufacturing, Politicization of Chinese Involvement, and Real Potential Solutions By Teddy Miller

ne of the hottest topics of debate during the recent presidential campaign here in the United States was American vs. Chinese manufacturing. Both sides used the issue to accuse their opponent of being soft on China and having allowed its economy to “steal” American jobs. A Romney campaign ad attributed the loss of over half a million jobs that occurred during Obama’s time in office to his policies and decisions regarding China, whereas Obama’s camp declared that “Romney’s never stood up to China,” citing Romney’s companies’ record of outsourcing jobs. Aspects of each side’s statements are backed up by factual evidence (according to the Bureau of Labor Statistics, half a million jobs were lost between 2009 and 2010; Romney’s companies did outsource American jobs), but others are heavily disputed (Obama’s administration created hundreds of thousands of jobs post-2010, while Romney was not in charge of the companies he had worked

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for when they invested in Chinese enterprises). Before figuring out who was right and who was wrong this past fall and summer, however, it is important to look beyond the sensationalized campaign media and determine whether or not we have indeed lost jobs to China, or if America’s manufacturing downturn is a sign of something else, something more complex than a basic process of outsourcing. The current leading source on the matter is a paper written by economists Justin Pierce from the Federal Reserve Board and Peter Schott from Yale’s School of Management. It argues that Chinese imports have, in fact, made the most devastating impact on American manufacturing jobs since 2000. In 2000, the U.S. Congress agreed to pass PNTR (Permanent Normal Trade Relations) as part of a deal to admit China into the World Trade Organization. According to the Pierce-Schott paper, rather than lowering tariffs on Chinese imports into the U.S.,

PNTR’s main effect was to “eliminate uncertainty” on Chinese imports by declaring that the tariffs would not be increased in the future. Pierce and Schott, although not against trade liberalization themselves, claim that “manufacturing employment [in the U.S.] would have been higher by over 4 million employees in 2007” were it not for the exposure to cost-effective outsourcing measures as a result of freeing up trade relations with China through PNTR. Although it might seem that China is to blame for American’s manufacturing downturn, Pierce and Schott’s analysis of potential solutions points to a more nuanced adjustment needed on the part of American government and business. Trade restrictions, for instance, are not the solution, according to Schott, “because, even though manufacturing employment fell [after PNTR], manufacturing value-added kept rising,” worldwide productivity increased, and American wages in other sectors went up due to the falling

The Big Red Scapegoat

prices of imports from China. In addition, the decline in U.S. manufacturing “would have continued as a result of liberalizations and reductions in the cost of managing global supply chains.” Schott believes that to combat manufacturing unemployment, “the U.S. should ensure that it has an educational system that is designed to build a highly skilled work force and is capable of helping workers retrain mid-career as the economy evolves.” Another solution, said Harvard economist Ricardo Hausmann in an interview with Antonio Regalado of the MIT Technology Review, is “for the U.S. to become the producer of the machinery that will power the next global manufacturing revolution.” In other words, to combat lower wages in other countries, the United States should focus its manufacturing power on “developments around information technology, 3-D printing, and networks [that] will allow for a redesign of manufacturing.” The United States is primed to take advantage of this sector, already having “deep knowledge, high R&D intensity, and the best science and technology base in the world.” Hausmann’s point reveals an intriguing possibility in the future narrative of the United States’ manufacturing power compared to China’s. In an article titled “Lost Manufacturing Jobs: Good Riddance?” Forbes contributor Edward E. Lawler III agrees that “there is no question that the U.S. has lost an enormous number of manufacturing jobs to lower wage

countries,” and that “given the current high unemployment rate in the United States, it is understandable that politicians point out that we need to regain manufacturing jobs and that the loss of jobs to other countries is a major problem for the U.S,” but where Lawler disagrees with the likes of Obama and Romney is in what exactly this loss in manufacturing jobs means for America. According to Lawler, the kind of low wage, repetitive work that basic manufacturing requires “has negative impacts on both individuals and society in general,” as highlighted by recent riots in Foxconn factories in Shenzhen. Examples in China show that the short-term goal of increasing low wage manufacturing has always caused “employee dissatisfaction and turnover, stress-related mental and physical health problems, dysfunctional union/management relationships and large social class differences in wealth.” Therefore, the U.S. should instead consider the more long-term goal of “keeping and creating the right kind of manufacturing jobs…the kind of knowledge work jobs that exist in the high-tech world and the advanced manufacturing plants of some major manufacturers.” Lawler would agree with both Hausmann and Peter Schott that the United States needs an educated workforce to take on these high-skilled, high wage jobs, and should not bring back the low wage, socially degrading lowskilled work that has been outsourced to developing countries like China for those very reasons.

insight

This is a long-term goal, however, and American politicians have been emphasizing what they believe to be solutions to the very serious and very current problem of high unemployment that could come into effect during their political tenures. Although the long-term solutions that the academics and other writers have been highlighting are complex and require much contemplation and careful action, one thing stands alone as crystal clear: China should not be blamed. Chinese manufacturing has only done what it can to become competitive and to improve the lives of Chinese workers. If anything, Chinese manufacturing has paved the way for the United States to become the leader in what could be the third industrial revolution, the development of advanced manufacturing systems and, with them, highly-skilled and high wage jobs. What could be done right now, in the short-term, is for the United States to set the stage for it to realize its long-term goals by stopping to blame China for causing the decline in U.S. manufacturing employment, and to start coming up with ways to actually alleviate them and even transcend them. Teddy Miller is a freshman in Branford College, Yale University, majoring in Economics and East Asian Studies. He is a member of the China Economic Forum’s Research Team and also writes for the Yale Economic Review. Contact him at theodore.miller@yale.edu. China Hands |

The Art of Adaptation By Sihan Chen

testing / Shutterstock.com

oing business in China has never been an easy task for American companies. Despite the tremendous growth of the Chinese economy during the past few decades and the fact

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that Chinaâ&#x20AC;&#x2122;s GDP is already half of the USâ&#x20AC;&#x2122;s, China typically accounts for only a small portion of the revenues and profits of American companies. This is primarily due to a few major barri-

ers. First, government laws and regulations pose various restrictions on the business operations of foreign companies in China. This openly blocks out most expansion opportunities for basic

The Art of Adaptation

material companies (for example, it is extremely difficult for Exxon Mobil to own an oil field or operate a service station in China – indeed, there isn’t any of these today) and the like. More subtly, the Chinese government blocks out companies like Facebook and effectively kicked Google out of the country. Second, the tastes and demands of Chinese consumers can be significantly different from those of Americans consumers. Taking jewelry as an example, Chinese consumers (especially the older ones) have a huge demand for gold products, but it’s difficult to find any gold products in an American jewelry store (which is instead typically stocked with silver, platinum, and diamonds.) However, there are a few American companies that have proven to be exceptionally successful in doing business in China. Yum! Brands, which owns chain restaurant brands such as KFC, Pizza Hut, and Taco Bell, is one good example. As of fiscal year 2011, China accounted for more than 40% of Yum! Brands’ revenue and around half of its operating profit. Despite its lackluster performance in its home country, the Kentucky-based company has been growing its revenue in China at around 30% a year. The company owns four brands – KFC, Pizza Hut, Little Sheep (hot-pot) and East Dawning (Chinese fast food) – and has more than 5,000 stores in China. The remarkable success of Yum’s China division

over the past two decades can be attributed to a few key factors. First, its image as a western brand was powerful in attracting customers’ attention and loyalty (sometimes, even frenzy) when many parts of China were at the early stage of opening up to the global economy. Second, its operational efficiency and economy of scale reinforced each other, resulting in cost advantage and quality guarantees. Third, Yum has made localization its key priority since its early stage of expansion. It was among the first foreign companies to discover that Chinese consumers value variety in food much more than their American counterparts. As a result, Yum’s KFC and Pizza Hut menus in China each contain more than 50 items, compared to around 30 items in the American menus. Moreover, Yum’s management observed that KFC’s most loyal customer group – young children – often come to KFCs accompanied by their parents and grandparents, who usually do not order anything or only order a drink (because fried chicken just do not cater to their tastes.) To tap into the wallets of these parents and grandparents, KFC introduced many Chinese fast food items, including chicken congee and pepper beef rice. Other American companies have learnt from the success of KFC and developed their own models of success (more or less focused on localization) in China. For example, Starbucks observed that while a majority of

insight

its customers in the US are “grab-and-go,” most of its customers in China prefer to sit comfortably in the store with their friends. In response, Starbucks abandoned its standard design of small coffee shops and started building spacious and well decorated stores in China. Similarly, Toys “R” Us discovered that Chinese parents particularly love toys which serve some educational purpose. As such, it devotes a huge amount of research and development resources to educational toys in order to get ahead of its competitors in the booming Chinese toy market. The art of war in the Chinese market is the art of adaptation. Though there are still people who doubt the influence and even the existence of local culture or national character in an age of globalization, there is no denying that Chinese society’s mores play a crucial role in determining how business is conducted in China. A new round of competition has already begun: only corporations that best adjust their mode of business to the Chinese way of life can prevail in this process of commercial “natural selection.” Sihan Chen is a junior in Jonathan Edwards College, Yale University, majoring in Ethics, Politics, and Economics. He serves as Vice President of China Economic Forum at Yale and previously interned at Ward Ferry Management in Hong Kong. Contact him at sihan.chen@yale.edu. China Hands |

Northeast Asia Interdependence Without Integration By Sandy Jin

ith the recent change in leaderships in China, Japan, and South Korea, questions have been raised about the opportunities and challenges facing the tripartite powers in an era of conflict and cooperation. Despite territorial disputes, China, Japan, and South Korea restarted free trade talks in November 2012, and promised to begin the first round of negotiations in early 2013. What are the implications of the establishment of a China-Japan-Korea Free Trade Area (FTA)? Is it politically feasible? If so, how will the FTA change the economic landscape of Northeast Asia and the world? It is noteworthy that territorial disputes did not disrupt, at least on the surface, the free trade talks between the three powers. In 2012, China-Japan relations underwent dramatic twists and turns, with Japan’s nationalization of the Diaoyu/Senkaku Islands followed by the eruption of massive anti-Japan protests across China. South Korea-Japan relations also deteriorated, with then South Korean president Lee Myung-bak landing on the disputed Takeshima/Dok-

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do Island to assert Korean sovereignty. Nonetheless, the three countries proceeded with the free trade talks, reflecting a sense of urgency and prioritized economic considerations. Both Japan and South Korea suffered from lackluster economic performance and the global financial downturn in 2012. The Chinese economy also slowed down, registering GDP growth rate of 7.4% in the third quarter of 2012 (a record low in recent years). As China is the largest trading partner for both Japan and South Korea, they hope that a free trade pact with China would further open up the vast Chinese market and boost their respective economies. On the other hand, as an emerging power, China needs the China-Japan-Korea FTA to counterbalance the US-led Trans-Pacific Partnership and secure its economic clout and geopolitical influence. China, Japan, and South Korea all have high hopes for the prospective FTA. According to one study, the China-Japan-Korea FTA would increase China’s GDP by 1.1%-2.9%, Japan’s GDP by

0.1%-0.5%, and South Korea’s GDP by 2.5%-3.1%. The FTA would include the world’s second and third largest economies, and account for about 20% of the world’s aggregate GDP. Once established, the China-Japan-Korea FTA would be on par with other major trading blocs/FTAs like the North American Free Trade Agreement (NAFTA) and the European Union (EU). However, there is a long way to go before the China-Japan-Korea FTA can be established. First, deep-rooted mistrust and political divergence between the three countries impede progress on the economic front. Traditionally, China has reacted strongly to any Japanese action that it deems intolerable. With the election of the nationalistic Shinzo Abe as Japan’s new Japanese prime minister, it remains to be seen if the three powers—long-entangled in historical grievances—can forge meaningful and constructive economic ties. Second, it is unclear to what degree the new leaderships in China, Japan, and South Korea will continue, or discontinue, the process of regional integration. China, Ja-

pan, and South Korea have all benefited from their trilateral trade, but further integration beyond economic exchange depends on policies of their new leaders. Third, all three countries have pressing domestic considerations. Japan and South Korea need to accommodate domestic farmers who fear, quite reasonably, for an invasion of cheap Chinese agricultural products once the FTA is in place. China, however, worries that its burgeoning industrial and technological base will face fierce competition from its neighbors in a more open market environment. Last, America is unlikely to tolerate a tripartite FTA without an American presence. As America pivots its focus to East Asia and attempts to confront Chinaâ&#x20AC;&#x2122;s rise in the region, the United States will spare no effort in interfering with any potential regional integration. Looking forward, complications and suspicions will no doubt remain. The transformation from an interdependent relationship into an integrated economic union will definitely be more difficult in practice than in theory. Sandy Jin is a freshman in Morse College, Yale University, and enrolled in Directed Studies, the intensive humanities program for freshmen. He is a member of The Independent Party of Yale Political Union. Contact him at qiuyuan.jin@yale.edu.

The Role of Foreign Banks in Consumer Led China The Need for Increased Competition By Manuel Martinez

uring Chinaâ&#x20AC;&#x2122;s Reforming and Opening-up efforts to gradually transform its economy into a quasi market economy, its financial system has been subject to constant modifications. China has set the ground rules to develop its financial system, from the creation of regulatory authorities and the modernization of state-owned banks to setting the framework for the participation of foreign banks. As China

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has become the worldâ&#x20AC;&#x2122;s second largest economy, it is clear that it needs a more sophisticated financial system to correspond with its increasing importance in the global economy. In the next few years, China faces the complex and gradual evolution from an export- and investment-oriented economy into a consumer-led economy. Today, exports and fixed investment make up almost 80% of

the countryâ&#x20AC;&#x2122;s GDP, while services account for around 35%, the smallest share when compared to that of any major economy in the world. Boosting consumption and increasing the share of services in the economy will perhaps translate into a smaller GDP growth rate but increases in both employment and wages. Even though the Communist Party is well aware of the pressing need to reform its current

The Role of Foreign Banks in Consumer Led China

economic model and maintain social stability by creating more jobs, one fundamental aspect of this major change is the role of the banking sector and particularly the role of foreign banks in the Chinese economy to boost competition for credit allotment and help fund privately-owned, labor-intensive companies. With the liberalization of the banking industry (including ownership requirements, foreign investments and the liberalization of interest rates and currency convertibility,) the Chinese economy will benefit from the increase in competition and available credit. Foreign banks will introduce new financial products that will allow savers to invest in more profitable instruments and the increased inflows of capital will result in greater liquidity for both consumers and producers. By allocating credit to private companies and not just state owned enterprises (SOEs), the government’s goal of procuring job creation and maintaining social harmony will be closer to reach.

The Central Bank

The People’s Bank of China (PBOC) does not enjoy as much independence as the Federal Reserve (Fed). At PBOC, the policy committee reports to the state council and other ministries, and collectively set out the monetary policy; at the Fed, the board dictates policy, without the responsibility of reporting to other parties. Additionally, since the PBOC has several mandates

other than keeping inflation low, there can be many opposing interests when dictating policy. The PBOC also oversees the exchange rate controls, and the sterilization of incoming capital flows is necessary to controlling the exchange rate and the levels of inflation.

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largely state-owned (and heavily regulated) specialized banks. Together, the Industrial & Commercial Bank of China (ICBC), China Construction Bank (CCB), Bank of China (BOC), and the Agricultural Bank of China (ABC) represent almost 50% of the total market share by assets.

The recent financial crisis that has shaken not only the most prominent banks in the US and Europe but also the banking systems of many a developed country has been a crude reminder of the true purpose of banks as the engine of an economy. Commercial Banks

The Chinese banking system is heavily regulated and there seems to be continuous reminders by both the authorities and the leaders of the largest commercial banks that their role is to develop the real economy, rather than to speculate in the capital markets with securities and other financial instruments. The recent financial crisis that has shaken not only the most prominent banks in the US and Europe but also the banking systems of many a developed country has been a crude reminder of the true purpose of banks as the engine of an economy. Additionally, the government has a massive influence and active presence in the banking system. Today, the banking industry is heavily dominated by the “Big Four”: a series of commercial,

In addition, several other policy banks and other smaller, government-controlled banks make up the rest of the market, with only a feeble 2% in the hands of foreign banks. All in all, China boasts more than 200 local banks, led by ICBC, the world’s largest bank by market capitalization, amount of assets, and number of outlets (over 16,000). The other three big Chinese banks rank amongst the ten largest banks in the world too. Although the central bank stopped operating the big commercial banks during the 1980’s to focus exclusively on regulation and the designing of monetary policy, PBOC still retains full control on the interest rates at which commercial banks lend money and attract savings, effectively creating a superficial credit market. Additionally, the main function of commercial China Hands |

feature The Role of Foreign Banks in Consumer Led China banks is to support SOEs and lend to companies which have been selected by the government, especially after the recent lending boom that was designed to mitigate the effects of the glob-

According to PricewaterhouseCoopers’ annual survey of China’s foreign banking sector, CEOs of foreign banks view regulation as their biggest challenge in doing business in China. Additionally, the report mentions that foreign banks support Shanghai’s plans to become a global financial center by 2020, but believe that it can only be achieved through interest rate liberalization and free convertibility of the RMB. With the liberalization of interest rates, banks would need to compete for deposits and credit allocation by offering more attractive The Continuous Need for Rerates. Freer convertibility of the forms and Changes in Regula- RMB would allow foreign banks to leverage on their global foottion China’s rule by the Commu- print and offer holistic solutions nist Party has, ironically enough, to their customers around the proven to be a determining factor globe. in the country’s march towards a market economy. Contrary The Role of Foreign Banks in to many democracies, a strong the Next China centralized government with no In describing the current state clear balance of power and vir- of affairs of China’s banking and tually no political opposition financial system, it is easy to see has the ability to make ardu- that it is a vibrant yet continuous economic reforms that reap ously developing industry. Chihuge benefits in the long run. na has to adapt its banking and Although China has gone a long financial system to the changing way in executing these reforms, times and to its increasing role it seems that the current polit- as one of the world’s leading fiical timing (with China having nancial and economic powers. chosen a new leadership recent- Whether it is because the Chily) has signaled a standstill in nese leadership wants to estabterms of passing new reforms, a lish the RMB as a global currency stalemate that will likely contin- or because it is actively rebalue into 2013. Amongst the most ancing the Chinese economy and awaited reforms are the free con- shifting its growth model from vertibility of the RMB, the liber- an export- and investment-led alization of interest rates, and a economy to a consumer-led one, tax reform. the Chinese banking system has

regional governments, foreign banks are becoming active players in both currency transactions and as advisors to their Chinese clients.

Although reforms seemed to have stalled during the past few months due to the change in leadership, the new Chinese leadership will surely address these problems. The world is watching: China needs to adapt to its new role as a global leader. al financial crisis. This crowding out effect limits the private sector’s access to credit within the formal commercial banking system, forcing it to fund itself through private investors or through shadow banking at above market rates. Foreign banks are also subject to a good deal of regulation that greatly limits their activities. It was only until recently that some foreign banks were licensed to issue credit cards and underwrite securities (through JV’s), and opening new branches is considerably difficult. HSBC, the largest foreign bank in China, boasts less than 120 outlets. Foreign banks in China cannot compete with Chinese commercial banks: as long as interest rates are not liberalized, banks will continue doing phenomenally well as they have an attractive net margin. Therefore, while local banks focus on gargantuan credits to develop the massive expansion of infrastructure and to fund

| Volume I Issue I Spring 2013

The Role of Foreign Banks in Consumer Led China

to be modernized and modified accordingly to adapt to China’s new position in the world. China enjoys one of the world’s highest savings rates as well as enormous inflows of capital, both from foreign direct investments and from its exports. This excess liquidity and huge reserves could be used to bolster the services sector by allocating credits to small- and medium-sized service companies that have no other viable means of

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funding. By liberalizing interest to its new role as a global leader. rates and allowing more competition from foreign banks, ChiManuel Martinez is a second nese people and businesses will year MBA candidate from the enjoy access to a wider array of Yale School of Management, financial products and capital focusing on finance. He is a will be allocated more efficiently. member of SOM’s Honor ComAlthough reforms seemed to mittee and will work for Citi’s have stalled during the past Investment Banking Division in few months due to the change New York City upon graduain leadership, the new Chinese tion. Contact him at leadership will surely address manuel.martinez@yale.edu. these problems. The world is watching: China needs to adapt China Hands |

feature A Glimpse at China

From Angola to Zambia Sino-African Relations in Light of Chinaâ&#x20AC;&#x2122;s Rebalancing By Dennis Wang

| Issue I Volume I February 2013

A Glimpse at China

n a 2011 speech in Zambia, former Secretary of State Hillary Clinton commented, “We saw that during colonial times, it is easy to come in, take out natural resources, pay off leaders and leave,” referring to China’s increasing presence in Africa. While the public perception in America — where anti-China rhetoric is fierce — is that China is the new colonial power in Africa, the debate rages as to whether the Chinese presence in Africa is beneficial to China in the long run. Although China will seek to gradually rebalance, it appears that its future will remain intertwined with Africa’s for the next decade, to the benefit of both China and Africa. When China does relax its dependence on Africa in the long term as it shifts from an export-led economy to a consumer-led one and from the secondary (manufacturing) to the tertiary sector (services,) its growth will become more sustainable, and Sino-African economic relations will be supplemented by stronger diplomatic relations.

China’s Rebalancing Imperative

China is notoriously dependent on natural resources and resource-intensive sectors such as manufacturing, construction, and infrastructure to fuel its economic growth. Inefficient use of natural resources by state-owned enterprises, the imperative to maintain GDP hyper-growth and employment given China’s labor-saving growth in the same

sectors, and China’s lack of its own primary sector (raw materials) have driven what Stephen Roach calls an “outsize claim on global resources.” China consumes approximately 50% of the world’s iron, coal, and cement, and in 2009, it surpassed the U.S. as the world’s largest consumer of oil. The same year, China consumed 384 million tons of petroleum, 66.8% of which was imported. Of this, 35% came from Africa.

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and imports ($48 billion in exports to Africa, $43 billion in imports) exceeding U.S. trade with Africa. China exports mostly manufactured goods, machinery, and transport equipment to Africa, and imports mostly crude materials and mineral fuels from Africa, including natural resources such as petroleum. Manmade products make up 90% of China’s exports to Africa, while raw materials make up 87% of Africa’s exports to China. The

China will need to balance the risks associated with the changing political climate of an unstable continent with its great potential for growth. Indeed, a more democratic Africa will not just be a passive observer, but an active participant in future Sino-African relations. China’s macroeconomy is primarily supported by export-led growth, which is susceptible to global demand shocks. But China is also dependent on imports of resources, which makes it vulnerable to global supply shocks as well. Many economists have stressed the need for China to rebalance its labor-saving, resource-intensive, and export-led economy to one that is less “unstable, unbalanced, uncoordinated, and ultimately unsustainable,” in the words of former Premier Wen Jiabao. In 2009, China became Africa’s biggest trading partner with USD $91 billion in total exports

result is a kind of dependency, suggestive of the mercantilist nature of transatlantic trade in the 17th and 18th centuries.

Can China Successfully Rebalance?

While it is not clear how much of growth in China is caused by growth in Africa and vice versa, bilateral trade means that the two, which are engaged in an economically mutualistic relationship, are co-dependent to some degree. Though trade with Africa accounted for only 4.3% of China’s total trade volume, real GDP growth in Africa and China have been correlated since China Hands |

feature From Angola to Zambia China’s New Africa Policy in 1999, which opened trade with the continent. Though Africa depends more directly on China for trade and investment than China depends on Africa for GDP growth, one of China’s major problems with this relationship is its effect on China’s ability to rebalance.

Sino-African Relations

An image of President Jacob Zuma of South Africa bowing to former President Hu Jintao at the 2012 Forum on China-Africa Cooperation (FOCAC) where China pledged an additional $20 billion in credit to Africa over the next three years to support

A break in the flow of natural resources would have multiplicative effects on the Chinese economy beyond just the balance of payments. Africa is not only a source of natural resources, but also a new market for Chinese goods. As demand from the West decreases due to economic and political forces, the profile of China’s exports will pivot increasingly to developing markets in Asia and Africa. Furthermore, a decline in the supply of natural resources from Africa can have unpredictable effects on the Chinese economy. The importation of oil has additive and multiplicative effects on the Chinese economy as an input in the resource-intensive sectors, which create the jobs and promote the capital accumulation necessary to fight poverty given that population growth is projected to continue until 2026. A break in the flow of natural resources would also have multiplicative effects on the Chinese economy beyond just the balance of payments. The solution to such threats to China’s economic growth and thus social stability is unclear.

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infrastructure, agriculture, and small businesses, is reminiscent of an image of President Obama doing the same at the 2010 Nuclear Security Summit. This loan was double the size of the loan in 2009, when China became Africa’s number one trading partner and lender. UN Secretary-General Ban Ki-moon also attended the Forum, highlighting the worldwide attention it received. African leaders have traditionally welcomed the Chinese given the lack of historical colonialism that defines the relationship between Africa and China, and China’s commitment to keeping business and governance separate. Chinese workers live and work with their African peers under similar working conditions and standards of living. A 2007 Pew Research Center survey found that 86% of Senegalese believed that Chinese involvement was positive, compared to 56% who felt the same way about U.S. involvement through

organizations such as the U.S. Agency for International Development (USAID). As a developing country, China may be leveraging its involvement in Africa to increase its influence on the international stage. To this end, China focuses on positive-sum interventions that benefit both parties, and based on its own experience with what works and what does not, supports economic development as the sustainable solution for Africa. Unfortunately, this comes with the preconceived assumption that what worked for China in the 1980s will work for Africa today, and that Chinese priorities in development — which often sacrifice human and environmental rights — are aligned with African ones, even if China does have the continent’s best interests at heart. There are already signs that the Sino-African relationship is souring, and it is unclear if China’s leaders have the political will necessary to make the difficult decisions that can improve relations again.

The Future of Sino-African relations

Many Africans are becoming anxious about the presence of Chinese in Africa. China’s priority, some claim, is not development, but rather its own economic welfare. Thus, the World Bank and the International Monetary Fund are advising African governments to coordinate in order to maximize bargaining power in negotiations with China on new contracts.

From Angola to Zambia

Recognizing the rise of such sentiments, Wen Jiabao stated at the 2012 FOCAC that “We [China] need to promote balanced development of trade between China and Africa.” As African nations become stronger politically and economically, China will be forced to make its intentions clearer or risk having its influence on the continent decrease considerably. China’s new president, Xi Jinping is expected to pay as much, if not more, attention to Sino-African relations than his predecessor, Hu Jintao. He would do well to acknowledge the priorities outlined by the New Partnership for Africa’s Development and the African Union and to consult African stakeholders on the proposed initiatives. The Brookings Institution identified health, security, and peacekeeping as three priorities for Africa where China could contribute through coordination with USAID, the World Health Organization (WHO,) and the AU. If left unchecked, HIV/AIDS, malaria, small arms, and drug trafficking will threaten social stability, and by extension China’s economic interests, in Africa. Though China may maintain its ties to African governments and thus secure its source of natural resources, Chinese manufacturing and retail firms will find it much more difficult to maintain cooperative ties with their local counterparts. Given the accusations of corruption and abuse of power, the Chinese government must take the initiative to promote transparency in its con-

tracts with African governments and to hold Chinese citizens accountable for their actions in Africa. Although China is unlikely to cave in to Western pressure, it may realize that reform is in its own interests. China canceled a waste pipeline project in July 2012 in response to violent anti-pollution protests in Nantong and a Foxconn Technology plant was closed in September 2012 following violent riots in Taiyuan. Listening to complaints from its African partners and addressing them constructively will allow China to stay involved in Africa in the long term, and to continue this mutualistic relationship.

China’s Policy Imperatives Going Forward

The future of Sino-African relations must be viewed in the broader context of China’s economy and its constraints such as population growth and overdependence on import of natural resources. For now, it is in China’s best interests to maintain a relationship where it is able to decide — on its own terms — when and how to engage with Africa. With the independence of South Sudan and the Egyptian revolution in 2011, the dynamics of the Sino-African relationship have already changed considerably since 2010. China will need to balance the risks associated with the changing political climate of an unstable continent with its great potential for growth. Indeed, a more democratic Africa will not just

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be a passive observer, but an active participant in future Sino-African relations. However, this relationship and its effects on Africa are almost surely more complicated, and difficult to predict without knowing the intentions of China’s new leadership, and China’s willingness to take on the social responsibilities that come with being an economic superpower. At present, Africa is too volatile and unreliable as a source of stable economic growth, and China should prioritize the rebalancing of its economy. Although China and Africa will continue to trade to their mutual benefit, and Africa’s share of China’s imports and exports will almost certainly increase, China should first and foremost look within its own borders for growth. Dennis Wang is a junior in Calhoun College, Yale University, majoring in Molecular Biophysics and Biochemistry, and Global Affairs. He is also an MPH student in the five-year program at the Yale School of Public Health. A member of the Yale International Relations Association, he is the Director-General of the Yale Model United Nations China Conference, and worked on development projects in Rwanda last summer. In the future, he hopes to work on global health issues in China. Contact him at dennis.wang@yale.edu.

China Hands |

feature A Glimpse at China

Chinaâ&#x20AC;&#x2122;s Impending Thirst How the Water Crisis Might Stop the China Miracle By Samuel Kim

| Issue I Volume I February 2013

A Glimpse at China

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TonyV3112 / Shutterstock.com

lthough the People’s Republic of China has grown exponentially over the past 30 years to become the second largest economy in the world today, it has not developed without a cost. Despite stellar indicators of growth such as an annual average GDP growth of 9.9 percent that has lifted 500 million people out of poverty, China still has a plethora of obstacles to overcome. In particular, environmental concerns are becoming more and more recognized to the point where they are now the fourth most important household concern. Within environmental concerns, the water crisis in China will be an imperative issue to address should the Chinese government want to continue in its march towards sustained prosperity. If no measures are taken to combat the water crisis in China, then by 2030, when China’s population reaches 1.6 billion, per capita water resources will drop to 1,760 cubic meters. This is perilously close to 1,700 cubic meters, the internationally recognized benchmark for water shortages. Even today, water is already very scarce— only 0.007 percent of Earth’s water is available to fuel and feed its 6.8 billion people. Given the scarcity of water, China must use this precious resource prudently to produce goods, produce energy, and aid transportation. However, while using water produces great benefits, it also brings with it immense challenges. For example, in the context of industrialization, one specific challenge is limiting the ongoing shift from low-profit yielding agricultural output to high-profit yielding industrial output. China should limit this industrial shift because although industrial output is increasingly much more profitable than agricultural output (1,000 tons of water can produce one ton of wheat worth $200, whereas the same amount of water used in industry yields an estimated $14,000 of output,) greater water resources will need to be transferred to industrial needs. Should this shift continue, and as water becomes an increasingly scarcer and more expensive resource, the agricultural sector will lose out to the industrial sector because industry is simply much more profitable. As agriculture loses out to industry, China will be forced to become a netChina importer Hands Magazine |

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pcruciatti / Shutterstock.com

of food, rather than a net exporter, which is a serious departure from its current position. Such a dramatic change will have dangerous implications for world grain prices. Furthermore, as more water is being used for industry, which is responsible for a great deal of pollution, China’s dwindling water sources will become more heavily polluted. To deter a mass agricultural to industrial shift, China should improve upon the profitability of agriculture, water replenishment, and the allocation of water resources to ensure that the overall benefits of water use in agriculture

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will outweigh the benefits of water use in industry. To improve the profitability of agriculture, China should strive towards organic agriculture since this would not only provide higher price premiums for rural communities, but also provide an increase in food safety and export opportunities. Moreover, assuming good flood control systems, the water from regular floods in the rainy season should be used to replenish the ground water manually. In order to improve its distribution of water resources and given its large and diverse land area, China should reorganize its cropping distribution to

ensure that water-intensive crops are planted only in areas that can support them in a sustainable way, while less water-intensive crops are planted in drier areas. When it comes to industrialization and pollution, China also faces the seemingly insurmountable task of recovering from years of damage to the environment. In particular, the issue of wastewater is one of China’s biggest problems. For example, industrial and biological pollution has contaminated almost 90 percent of the underground water in Chinese cities. Furthermore, China’s environmental regulators have designated 48

China’s Imprending Thirst

of China’s major lakes as seriously polluted. One-fourth of the water sampled along China’s two largest rivers—the Yangtze and Yellow— was designated as too polluted for farm irrigation. Hence, it is abundantly clear that wastewater is a prominent issue that the country has to address in the near future. Given that the wastewater discharged by industrial functions made up 44.7 percent of the national total in 2006 and pollutant discharge per unit of industrial added value was one of the highest, China should focus on reforming its industry structure to lower the proportion of industrial added value in GDP. Also, in dealing with wastewater treatment and recycling, new regulation on water resource utilization will limit the annual consumption of water to 635 billion cubic meters by 2015, further increasing the need for water recycling facilities. For this reason, China expects to spend $69 billion on industrial wastewater treatment. Since per capita water resource in China is only a quarter of the world’s average, and industrial water consumption constitutes a quarter of the country’s total water consumption, the recycling of deeply treated industrial waste water is imperative and should be expedited in the near future. As long as China exerts effort to clean up and mitigate the harmful effects of the water crisis, the World Bank projects that China’s wastewater emissions will decrease in the years to come. Besides wastewater, another significant foreseeable problem is the water shortages that will arise if

new coal power bases are built in China. At least some 10 billion cubic meters of water—equivalent to about one sixth of the annual total water volume of the Yellow River—will be consumed by 16 new coal power bases in China in 2015, triggering severe water crises in the country’s arid Northwest. As a result, arid Northwestern provinces such as Inner Mongolia, Shaanxi, and Ningxia, where 11 of these coal bases are situated, will see their water supply capacity being severely challenged in two years’ time.

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often resort to demonstrations to draw attention to their plight (including 180,000 demonstrations in 2010 alone.) In the summer of 2010, for example, thousands of villagers in Guangxi province protested against the heavy pollution caused by an aluminum company, which had contaminated the villagers’ drinking water and caused their crops to suffer. In the end, three protestors were killed and a number of villagers were wounded. The intensity of these protests demand compensation for those affected by water pollution.

Only 0.007 percent of Earth’s water is available to fuel and feed its 6.8 billion people. To discourage the building of too many coal plants, China should levy taxes on pollution through taxes on carbon and sulfur emissions. The purpose of these taxes would be to internalize the external cost of dirty energy such as coal, and to force coal and power enterprises to use cleaner technologies that would cut down on their water usage. Industrialization and the pollution it has left behind have brought about irate citizens and a fury of riots, given that environmental concerns are a significant cause of mass protests in China. Endemic corruption and a weak legal infrastructure contribute to devastating pollution accidents, as well as to long-term degradation and pollution. Without effective legal redress for environmental wrongdoing, victims of environmental pollution

To address its pollution problems, China already has a fairly complete set of environmental laws and regulations. For example, the Water Pollution Prevention and Control Law provides stipulation that water pollution victims can seek class action lawsuits to directly obtain civil compensation from polluters. On paper, such laws appear to be very effective. But in actual practice, justice does not always happen—China lacks the necessary personnel, standards, and mechanisms to uphold the rule of law effectively. To address this, China should increase the number of dedicated law enforcers and encourage enforcers to take more initiative. Also, clearer standards must be set and more efficient mechanisms should be set in place to monitor and curb industrial malpractice. China Hands |

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One such mechanism would be to enforce harsher punishments for breaking environmental regulations. As it stands today, it is cheaper to break the law and pay a small fine than to obey the law and spend substantial amounts

inspectors leave, the pollution-reducing equipment gets switched off immediately. Simply put, the current system naturally spawns a game of cat and mouse. To prevent this, polluters will have to pay higher fines or even go so far as to

Simply put, the current system naturally spawns a game of cat and mouse. of money on eco-friendly functions. This is precisely why some penny-pinching Chinese companies only run pollution-reducing equipment in the day time, or only when inspectors are present to check up on them; when the

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undergo criminal proceedings in order to strongly discourage these Chinese companies from breaking environmental laws. Although reforms will be difficult to implement, they can be carried out. Persistent conservation

of water, the regular recycling of water, and a wise allocation of this precious resource will ensure stability and prosperity for the future. Better accountability in terms of water malpractice will also bring about a culture of water conservation. The arduous journey ahead requires China to unite as a country to overcome the water crisis. Samuel Kim is a sophomore in Silliman College, Yale University, majoring in Economics. He is interested in China’s environmental economics and will study abroad in China this summer. Contact him at samuel.kim@yale.edu.

Does America need a stronger China lobby? By Kyle Hutzler

ince the normalization of relations between the People’s Republic of China and the United States, China, consistent with the normal practice of international relations, has traditionally engaged the US political system through the executive branch. In the past decade, however, China has initiated efforts to significantly deepen its relationship with Congress. The intensification of Chinese engagement with Congress is driven in part by a shift in the nature of economic relations between the two nations as Chinese entities seek to enter the US market, but is also attributable to a moderation in support from US corporations which have historically lobbied on China’s behalf. Despite China’s heightened engagement with Congress, its influence remains modest. Going forward, the risk of more volatile bilateral relations driven by hostile congressional actions would suggest the need for further cultivation of Sino-Congressional relations – not simply for China’s sake – but for that of the US as well.

The normalization of relations between the two nations beginning with US President Nixon’s historic 1972 visit was driven by both countries’ national security objectives during the Cold War and China’s desire to secure diplomatic recognition as proof final of its legitimacy on the global stage visà-vis Taiwan. During this period, US-Sino political engagement was concentrated within the US executive branch, which exercises broad constitutional discretion over foreign policy. At key moments, however, Congress has played an important role in the two nations’ relationship beyond its oversight responsibilities, including the passage of the 1979 Taiwan Relations Act and sanctions in the wake of the 1989 Tiananmen Square tragedy. The liberalization of China’s economy in 1978 set in motion a new dynamic in US-Sino relations in which economic affairs became the central feature of the bilateral relationship in the denouement of the Cold War. Relative to national security issues, Congress exercises

considerably greater latitude on economic issues. Despite this reality, China has historically relied on the US executive branch and US multinationals eager to enter the Chinese market to advocate on its behalf to Congress. Up to the establishment of permanent normal trading relations with China in 2000, the country could count on the support of industrial giants including Boeing, General Motors, and Caterpillar to sway Congressional opinion each time China’s status came up for renewal. Until as late as the late 1990s, China’s Washington embassy had only one official devoted to congressional affairs.

Shifting Allegiances

Increasingly, however, China has had to look to its own initiative as three important shifts began to diminish its traditional allegiances. First, the ballooning US trade deficit with China and its topping of the United States as the world’s largest manufacturer made it an important flash point in US politics due to the weakness of the US China Hands |

feature Does America Need a Stronger China Lobby economy. This has put pressure on the executive branch, which has historically been more moderate in rhetoric and approach. Second, increased efforts by Chinese companies to directly acquire US assets or enter the US market have similarly heightened political tensions, particularly when potential national security interests are called into play.

the Democratic National Committee during the 1996 elections. The motivating factor behind China’s 1990s push to influence US politics was President Clinton’s yielding to congressional pressure to grant then Taiwanese president Lee Teng-Hui a visa to attend a class reunion at Cornell University over Beijing’s strong protests. Despite being labeled a “private visit,” it

The risk is that, if not moderated, Congress may become a source of unnecessary instability in the world’s most important bilateral relationship. Third, US multinational firms have become less willing to exercise their influence on behalf of China as they have become increasingly disillusioned by restrictive market access. In most cases, this criticism has been discreet, conducted through trade groups, because companies fear that open criticism of China would subject their firms to hostile treatment. General Electric CEO Jeffrey Immelt’s comment in 2010 that China had become hostile to foreign multinationals and that he was looking for opportunities elsewhere was shocking not for his thinking, but for his willingness to give voice to it.

Taking the Initiative

China’s first major effort to strengthen its influence in Washington in the 1990s became embroiled in scandal amidst allegations that agents working on behalf of Chinese interests attempted to illegally direct campaign contributions to

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was widely perceived as a diplomatic coup for Taiwan. It was then that the Chinese government began to develop proposals to deepen its understanding of and ability to promote its interests with Congress and the American public, particularly Chinese Americans, according to a Senate report published in the aftermath of the campaign finance scandal. While legal for foreign governments to promote their interests through lobbying, public relations, and other political activities, these activities must be registered; it is illegal for foreign agents to attempt to influence US elections through campaign contributions. Twenty-two individuals were ultimately convicted in what was dubbed “Chinagate.” Since the controversy, China has been sensitive to the fact that too strong of an engagement, particularly aggressiveness in legitimate lobbying spending, could prompt

a political backlash. Thus, while China has retained the prominent Washington lobbying firm Patton Boggs at a $35,000 per month retainer, the country has appeared to mostly take the lead directly. In 2008, it opened a new $200 million embassy in Washington and substantially expanded its legislative affairs section. During his tour in Washington, Chinese ambassador Zhou Wenzhong visited some 100 senators and representatives in their districts. Within ten years China has progressed from near ignorance of Congress, to clumsy engagement, and now considerable sophistication. “They have built up a very nuanced understanding of how Congress works,” one official told Reuters. The 2011 bill sponsored by Ohio senator Sherrod Brown that threatened to subject the exports of any nation with a “fundamentally misaligned” currency to steep countervailing duties was an opportunity for China to demonstrate its newly sophisticated lobbying presence at work. According to Reuters, the Chinese embassy’s congressional liaison team made a full-play effort against the bill, meeting with important aides, making phone calls, speaking to the White House, and drawing on lobbying firm Patton Boggs. It also demonstrated that, for now, China’s traditional reliance on the executive branch and American multinationals was not yet exhausted. The Obama administration maintained a conspicuous silence on the bill and more than 68 organizations, including the US-China Business Council, Boeing, and Honeywell, registered to

Does America Need a Stronger China Lobby

lobby the bill, according to First Street Research Group. Despite these efforts, the bill was passed in the Senate on a 63-35 vote. It was prevented from coming to a vote in the House of Representatives by Speaker John Boehner – closer to a draw than outright victory on a bill that brought with it the risk of launching a trade war.

Finding a Place for Congress at the Table

Positively for US-Sino relations, several members of both houses of Congress have sought to deepen and facilitate a more productive dialogue. Republican Senator Mark Kirk of Illinois has been responsible for the founding of both the House and Senate’s US-China Working Group. “Across the board, the US and China continue to grow interdependent every day and we need a nuanced policy that reflects this 21st century reality. At

the same time we need to create a space for senators to hold open and frank dialogue with Chinese leaders on areas of disagreement,” Kirk said at the time. In 2011, on the sidelines of the US-China Strategic and Economic Dialogue, which was organized by the executive branch, Chinese Vice Minister of Foreign Affairs Dai Bingguo met with the Senate group while the House group met with Vice Premier Wang Qishan. Limited direct engagement with Congress, while consistent with most countries’ practice, is inappropriate for one of China’s strategic importance. Congress will continue to play a more involved role in US-Sino bilateral relations than is typical of relations with most countries. While at times the threat of Congressional action is an important back-up to its primary oversight role in international relations, the risk is that, if not moderated, Congress may become a

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source of unnecessary instability in the world’s most important bilateral relationship. Congress is justified in criticizing the array of subsidies which benefit Chinese exporters at the expense of American firms just as it is right to continue to be a vocal defender of human rights. Yet the brinksmanship which has marked much of Congress’ recent actions towards China is unsettling. Such actions cannot credibly be said to be in the United States’ interests and diminishes the leadership role of the executive branch. Likewise, China must act with greater maturity in its engagement with the executive branch. Regular cessation of bilateral contact as an act of protest by China undermines the executive branch and emboldens Congress. If there is no strong executive branch relationship for Congress to jeopardize, it is less restrained from its worst impulses. A stronger China lobby is in the interest of both nations if it can effectively moderate the momentum towards counterproductive confrontation and restores the executive branch’s more measured leadership in US-Sino affairs. Kyle Hutzler is a junior in Calhoun College, Yale University, majoring in Economics. He has recently returned from several months in China and is interested in American economic competitiveness issues. He has previously interned at the US International Trade Commission in Washington D.C. and McKinsey & Co in New York City. Contact him at kyle.hutzler@yale.edu.

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feature A Glimpse at China

Klaus Kleinfeld

| Issue I Volume I February 2013

A Glimpse at China

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laus Kleinfeld is the CEO and Chairman of Alcoa, the world’s leading producer of primary and fabricated aluminum and the world largest miner and reﬁner of alumina. Previously, he was the CEO of Siemens AG. Klaus received a business degree from Georg August University and a Ph.D. in management from University of Würzburg.

Interview by David Yin and Yingqi Tan CH: What are Alcoa’s comparative advantages in the market? KK: Alcoa has been an industry leader since

its founder Charles Martin Hall created the aluminum industry over 125 years ago. Since then, we have continuously developed technologies that allow our customers to make the best use of aluminum’s unique properties – lightweight, durable, non- corrosive and infinitely recyclable. In these ways and more, the ultimate advantage lies in the uniqueness of what we call our Miracle Metal. Arthur Vining Davis, Alcoa’s President and Chairman in the early 1900s said, “While it was a great and wonderful thing to invent the process for making aluminum, it was an infinitely more difficult problem to make aluminum commercially, and a still greater problem to utilize the aluminum when made.” That’s still true today. To that point, our vertical integration – producing aluminum, rolling aluminum, and engineering unique and specialized products for our customers – is a huge advantage. All along our value chain, we have the best China Hands Magazine |

interview Klaus Kleinfeld technical experts. Our ability to draw on that expertise is something that no other company can offer its customers and partners. In fact, at our Alcoa Technical Center, an entire campus of scientists is working to develop new and efficient processes for production and new innovations that give our customers an edge in the marketplace. That is a comparative advantage for Alcoa. Our ultimate competitive advantage, frankly, is our people. Talent is the only sustainable advantage, and we have it in abundance – we operate in 30 countries and have a diverse and incredible pool of talent to pull from. When we need to solve an Alcoa problem or a customer problem, we have the resources and the collaborative culture to exceed our customers’ expectations.

consumption. While it is questionable whether having so much aluminum capacity makes the best use of China’s constrained natural resources and coal-fired energy, I am confident that the fundamental megatrends driving the aluminum market in China will continue for some time. Urbanization and middle class growth, two primary outcomes of China’s ascent, are big opportunities for Alcoa because our products are used in the building and construction, automotive, aerospace, beverage packaging, consumer electronics, and industrial sectors. The global aluminum outlook is also positive. In January, I was on a panel at the World Economic Forum in Davos titled ‘Beyond the BRIC Wall’. An important insight from that discussion was that

electronics markets.

CH:

What is Alcoa’s strategy for entering China? What can Alcoa and China offer each other?

KK:

Alcoa already has several well-established operations in China. And, we’re always looking for new opportunities where we can add value. In fact, we just set up an Alcoa Wheels operation in Suzhou, this past December to serve the commercial transport sector, and we signed another agreement with the aircraft manufacturer COMAC to share our expertise in aerospace fasteners for their new C919 plane. China is a great business environment because there is ample opportunity and a positive growth climate. That enthusiasm for growth has led to a rapid expansion of heavy industry that is largely supported by coal-intensive energy production. China must be careful – and I believe its leaders are cognizant of this – that is doesn’t achieve further economic growth at the expense of the health of its people or its environment. Alcoa has a lot to offer its partners, customers, and communities in China. First, our company culture is grounded in the universal while China’s economic growth principle of respect. That means CH: What is your outlook for the rate is unmatched, the associated we constantly pursue a target of aluminum industry in China and trends of urbanization and mid- zero injuries and fatalities among the world? What macrotrends are dle class growth are not isolated to our workers and we do not cut you betting on? China. In reality, these trends are corners in our environmental reRespect – for our KK: Over the last few years, China’s unfolding all over the world and sponsibilities. employees, our customers, our aluminum industry has grown at they drive demand for aluminum communities and the environment an incredible rate. China currently and the fabricated products we – is what secures our license to opaccounts for roughly one-half of sell into the aerospace, building erate in so many countries around global aluminum production and and construction, and consumer

I would say two things, the rule of law and environmental protection, are the major challenges associated with China’s current growth trajectory. If they go on unresolved, they will stunt China’s growth, and risk societal unrest – and we have seen some signs of this already.

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Klaus Kleinfeld

the world. That is a fundamental benefit that Alcoa brings to every market and every collaboration. More specifically, our leadership in the market for high-end fabricated aluminum means that we have the experience and expertise to support the escalating demand for aluminum in cars, buses, planes, trains, consumer electronics, and many other markets in and outside of China.

KK:

As I mentioned, China’s strengths are its rapidly growing domestic market, its increasingly powerful and outspoken middle class, and its vibrant entrepreneurial spirit. China’s companies are strong and assertive, and they are extremely well managed. I would say two things, the rule of law and environmental protection, are the major challenges associated with China’s current growth trajectory. If they go on unresolved, they will CH: What are some of the strengths stunt China’s growth, and risk soand weaknesses of China and cietal unrest – and we have seen its corporations, as compared some signs of this already. Having to America and other developed said that, the 12th Five Year Plan is clear, comprehensive, and on countries?

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target to resolve some of those issues. Time will tell how well those reforms are implemented. In terms of performance, Chinese corporations are just as competitive and innovative as those in the Western world. However, many of them are exposed to a very different set of financial circumstances than their international competitors. There have been many calls for financial liberalization in China. If that happens, the competitive dynamics will change considerably.

CH: What advice do you have for American and Chinese college students today? What are some China Hands |

interview Klaus Kleinfeld opportunities for them with the nization. Finally, I believe people growing US-China relationship? need the freedom to do their job, KK: Chinese and American stu- but that freedom must come with dents have so much to gain from accountability.

company and as individuals. So I focus on this a lot. You are right to say that commodities, like aluminum, have seen significant price swings in recent years. With so one another, and each could benefit from a stronger relationship. CH: In recent years, much capital much financial noise, we cannot Take advantage of the time you has gone into natural resources stick our heads in the sand and have together at Yale – collabo- and commodities, creating bub- wait. We stay proactive. For the upstream smelting and rate and build your networks. In bles and driving volatility. How the future, strong East-West ties does Alcoa deal with such fluctua- refining operations, this means moving down the cost curve. Acwill pay even more dividends than tions and uncertainties? they do today. There is a huge up- KK: One thing I am certain of is tions such as generating productivity improvements, securing side there. this: uncertainty will never go energy solutions and our joint I would also encourage Ameri- away. In many ways, the actions can graduates to be open to work- we take under uncertainty deter- venture with Ma’aden in Sauing in China. As you might imag- mine how successful we are as a di Arabia are examples of Alcoa ine, international experience is almost a requisite for a successful business career these days. As international trade and collaboration continue to grow, companies are willing to pay a premium for talented, driven people who have experience outside their home country.

CH: What are the keys to your success running such a large, multinational company with operations in so many sectors? What is your leadership style? KK: First, all employees at Alcoa,

regardless of their level or location, must demonstrate not only a high performance in their work, but also live the values we hold dear in our company. I call this the “values-performance paradigm”. This is paramount. Second, no one can work in isolation. Alcoans know my personal mantra: “Nobody is perfect, but a team can be.” Teamwork, honest and timely feedback, and communication are keys to success for any orga-

| Volume I Issue I Spring 2013

Klaus Kleinfeld

doing just that. In the mid and downstream operations, where exposure to metal prices is much lower, our focus is on profitable growth. That means innovation, new products, and capturing market share. Fuel efficiency standards in cars and the rapid growth in aerospace have been excellent opportunities for us to grow profitably and gain share in those markets. Finally, an essential aspect of this is managing for cash. Our efforts to maintain a positive free cash flow position give us the flexibility we need to pursue our strategy through these volatile times.

CH: Will Alcoa’s operations be severely affected by the rising costs of energy? KK:

Well, there are two sides to that coin – I will explain: On one hand, aluminum production is a very energy-intensive process. If energy costs continue to rise – driven by environmental regulation, supply shortages, or taxation, whatever the lever is – we will be affected. However, Alcoa is well positioned because we rely heavily on hydroelectric power – one of the most sustainable and efficient sources of energy. However, we can’t sit back and wait for things to happen to us. We can control how efficiently we use the energy we generate and pay for. If we get more aluminum, more production, per unit of energy than our competition – energy price changes affect us less than the competition. That puts us at a

competitive advantage. We have a diligent and systematic approach to energy efficiency within Alcoa.

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German, I have been exposed to a different style of corporate management, and a different business

As international trade and collaboration continue to grow, companies are willing to pay a premium for talented, driven people who have experience outside their home country. ecosystem. So perhaps my experience in both worlds has helped me bridge the gap between the two. It has to be said, however, that Alcoa was a global firm long before my arrival. Over time the aluminum market has gone from a relatively concentrated group of competitors to quite an open and international competition – and Alcoa has led that process. David Yin is a sophomore in Berkeley College, Yale University, majoring in Economics and East Asian Studies. He serves as President of the Alliance for Southeast Asian Students at Yale CH: You are a non-American and writes for Forbes Magazine heading a top American com- in New York City. Contact him at david.yin@yale.edu. pany. What are the benefits and challenges of this? Has this influYingqi Tan is a junior in Pierson enced Alcoa’s increasing internaCollege, Yale University, majoring tional presence? in Economics and Mathematics. KK: I only see benefits. I love the She serves as President of entrepreneurial atmosphere in the China Economic Forum at Yale US and I think the US is still one and previously interned at of the best – if not the best place Morgan Stanley in Hong Kong. to do business. International exContact her at perience is a valuable thing. Diyingqi.tan@yale.edu. verse opinions and perspectives are essential within large international firms like Alcoa. As a

That is one side of the coin. The flip side of that argument is that aluminum contributes to energy efficiency in every market it touches. Planes, cars, trucks, consumer electronics, even buildings are more efficient as a result of using aluminum. If the cost of energy goes up for us, it will most likely go up in those end markets as well. Aluminum intensive products are energy efficient products. So that spells growth for us. For example, CAFE standards in the U.S., mandating fleet-wide fuel efficiency, are great news for Alcoa.

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feature A Glimpse at China

Weâ&#x20AC;&#x2122;re hiring the worldâ&#x20AC;&#x2122;s best and brightest! 2

For 125 years, the people of Alcoa have partnered to create innovative and sustainable solutions that move the world forward. If you are looking to work in an environment where you can contribute to challenging and innovative work, collaborate with world-class teams, and grow professionally, visit www.alcoa.com/campus.

| Issue I Volume I February 2013 Advancing each generation.

YALE-CHINA ASSOCIATION A Glimpse at China

Health

Education Education was the original mission of the Yale-China Association at its founding in 1901, and that tradition continues to this day through a variety of programs. The most well-known of these programs is the Yale-China Teaching Fellowship, through which hundreds of Yale graduates since 1909 have taken on two-year teaching appointments in China. Over the decades, we have continually updated our programs to adapt to changing conditions in China and in the United States, but at its core our work has always remained true to the values of service, learning, and deep understanding.

Yale-China has been engaged with health education in China since the early years of the 20th century when we founded medical institutions in Hunan province that remain major centers of medical education and care to this day. Current initiatives include work in nursing education, fellowships for Chinese women in the health professions, community outreach, medical student exchange, residency training, HIV/AIDS education and prevention, research ethics, and scholarship for medical students at Xiangya School of Medicine.

Leadership and Service Yale-China’s Leadership and Service encompasses different areas related to public and community service, including law, business and society, nonprofit development, and community and volunteer service. Participants travel to China and the U.S., work with local organizations, volunteer with peers from other academic institutions, and make life-changing connections through their work.

insight

Arts While Yale-China’s historical roots lie in health and education programs, Yale-China has provided countless opportunities for communities in China to learn about Western arts as well as opportunities for communities in the United States to explore Chinese arts. In keeping true to its mission, Yale-China is currently researching the needs of artists with an emphasis on arts education and crosscultural exchange. With the support of arts patrons and new donors, Yale-China is able to implement arts initiatives that feature crosscultural collaboration among artists.

ABOUT THE YALE-CHINA ASSOCIATION Founded in 1901, the Yale-China Association is a private, nonprofit organization with more than a century of experience building relations at the grassroots level between the U.S. and China.

MISSION

The Yale-China Association (雅礼协会) inspires people to learn and serve together. Founded in 1901 by graduates of Yale University, we foster long-term relationships that improve education, health, and cultural understanding in China and the United States.

VISION

We envision a U.S.-China relationship of mutual understanding and profound respect nurtured by collaboration among individuals and institutions.

VALUES

Mutual Respect: We value direct personal relationships and two-way exchanges characterized by mutual benefit, independence, trust, and understanding. Personal Growth and Responsibility: We encourage participants and program alumni to become leading contributors to a more peaceful, just and sustainable world. Program Focus: Relevance, Excellence, Impact, Innovation: We focus our work on regions and sectors where there is great need. We seek to implement high-quality programming with long-term impact and significant cross-cultural interchange.

www.yalechina.org

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