CEO Daily: Saturday May 6

May 06, 2017

Good morning.

Westerners visiting China rarely stop in Yiwu, the sprawling metropolis just south of Jack Ma’s hometown of Hangzhou. That's a shame. Yiwu can teach you a lot about how Jack’s company, Alibaba, became such powerhouse--and why China’s entry into the world economy was so disruptive. The city is best known as home of the world’s largest “Small Commodities Market,” a vast wholesale bazaar where you can haggle face-to-face with sales reps from the myriad small and medium-sized enterprises Alibaba’s online platform helped connect to foreign buyers. Kitchen knives, golf equipment, lava lamps, garden gnomes, sex toys; you name it, somebody at Yiwu sells it.

Thanks to the commodities market, Yiwu itself is surprisingly cosmopolitan, but not in the way you might expect. The town center teems with traders from the Middle East, Africa and Central Asia. On my first visit in 2007, I marveled at the throng of kebab vendors, women in hajibs, men smoking shisha pipes. There’s even a huge mosque! Over the years, Yiwu has been featured in the Western press as “Sock City,” and “The Town That Makes Christmas.” The city made global headlines again this week for becoming the eastern terminus of Chinese president Xi Jinping’s ambitious “New Silk Road” initiative.

Yiwu earned this new distinction with the arrival, on April 28, of a bright red locomotive pulling “East Wind,” the first train to travel directly from London to China. The train included 33 cars carrying 88 freight containers. The cargo: vitamins, baby formula and Scotch whisky. East Wind departed from Stanford-le-Hope, Essex just outside London, traversed the English Channel by tunnel to France, then wound its way through Belgium, Germany, Poland, Belarus, Russia and Kazakhstan before crossing back into the Middle Kingdom. There were multiple stops to switch locomotives and trucks to accommodate the many different railway gauges and signaling systems. In all, the 7,500-mile journey required 18 days. London is now the fifeteenth European city to establish direct rail links with China. The hope is that the London-Yiwu route will become a regular commercial freight service.

East Wind’s journey is the latest manifestation of Chinese president Xi’s dream of linking China’s economy to those of Asia, the Middle East, Africa and Europe via a grand infrastructure scheme he calls “One Belt, One Road.” The Chinese leader floated his “belt” and “road” proposals in separate speeches in 2013. They’ve since been merged into a single concept, and touted as Xi’s signature foreign policy initiative.

The plan’s terminology is befuddling. The “belt” involves a network of land-based roads, railways and power projects that would link China’s western regions to Central Asia and eventually Europe. The “road” is refers to a maritime route from Southeast and East Asia round Africa and into Europe.

We’ll hear more about “One Belt, One Road” (a.k.a. OBOR) on May 14-15 when leaders from nearly 30 nations gather in Beijing for an elaborate conference to discuss Xi’s vision. Among those scheduled to attend: Russia’s Vladimir Putin, Turkey’s Recap Tayyip Erdogan, and the Philippines’ Rodrigo Duterte. OBOR, like Yiwu, has yet to attract many Westerners. Italy is the only Group of Seven nation sending a head of state to the Beijing confab, although the managing director of the International Monetary Fund, Christine Lagarde, is expected to make an appearance.

For now, there’s no clear blueprint or timetable for OBOR, and little in the way of organizational structure to implement them even if they existed. Foreign minister Wang Yi acknowledged as much in remarks this week. The summit, he promised, will produce a document defining the initiative’s goals and identifying common values.

Blueprint or no, the scale of China’s aspirations boggle the mind. The various projects discussed in connection with the OBOR initiative would involve more than 60 countries and dwarf the Marshall Plan, the U.S.-led effort to reconstruct Europe after World War II. At the World Economic Forum in Davos this January, Xi said more than 40 countries and international organizations have signed cooperation agreements related to the effort, and that Chinese companies have invested more than $50 billion so far in Belt and Road-related projects. Fitch Ratings, in a recent report, estimated more than $900 billion in projects are planned or underway, and projected that OBOR-related loans from Chinese banks could total $1.2 trillion.fitch

Western experts disagree on whether OBOR should be taken seriously. Louis Kuijs, head of Asia economics at Oxford Economics, says the program could have far-reaching strategic and economic consequences. David Shambaugh, a leading U.S. China scholar, worries that China is ramping up support for the New Silk Road as the West seems in retreat. Many analysts note that Xi’s vision of a New Silk Road burnishes his credentials as a champion of free trade and global cooperation, while U.S. President Donald Trump’s decision to kill the Trans Pacific Partnership trade agreement underscores his image as an “America First” nationalist.

And yet there is reason for skepticism about China’s grand designs. It’s far from clear Belt and Road projects make economic sense. A recent Wall Street Journal commentary argued that, as growth of its economy slows, China will tire of squandering money on Silk Road white elephants. Other observers say Chinese planners and builders, accustomed to operating in China’s authoritarian political system, lack the technical and political skills needed to implement disruptive infrastructure projects in more fractious nations. China’s infrastructure investments have provoked local backlash in Sri Lanka, Indonesia, Malaysia and Myanmar. In many emerging countries, government and business leaders fear “One Belt, One Road” will prove a one-way street, with infrastructure projects fashioned to maximize extraction of resources for China and speed delivery of cheap Chinese exports.

As for the East Wind, South China Morning Post contributor Tom Holland argues there isn’t much call for a new rail service between Yiwu and London. The cost of shipping at 40-foot container by rail from Europe to China, he notes, is about $2,500 — at least $1,000 more than the cost of sending it by sea. Rail may be quicker, but Holland can’t think of any goods for which it would be worth paying such a large premium to get deliver in 18 days rather than 35. And where a single large cargo ship can carry 10,000 containers between Europe and China in five weeks, to shift that many boxes by rail would require nearly 300 East Wind trains leaving at intervals of 80 minutes apart for 17 days. Upgrading the railway network to a handle that kind of traffic would cost tens of billions of dollars. For rail cargo, Holland concludes, the idea of a Belt and Road route between Europe and China is “nothing more than a fanciful curiosity.”

Enjoy the weekend!

Clay Chandler
@claychandler
clay.chandler@timeinc.com

Politics and policy

  • Can Jack Ma create a million U.S. jobs? Jack Ma was the first Chinese business leader to score an audience with Donald Trump after his election as U.S. presidential election. In that meeting, at Trump Tower in January, Jack offered to use Alibaba’s online sales platform to help American small businesses expand sales to China. He promised that effort would create a million new U.S. jobs. To that end, Alibaba announced this week it plans to hold a job creation fair in Detroit on June 20-21. The company expects more than 1,000 U.S. firms to participate. But in an essay on Fortune.com, University of Texas lecturer John Doggett says U.S. firms should be wary of Ma’s pitch. Fortune
  • Trump’s new envoy to Beijing: The US Senate this week will consider Trump’s nominee for ambassador to Beijing, Iowa Governor Terry Branstad. Branstad is no stranger to China. He’s made more than half a dozen trade missions to the Middle Kingdom. Iowa’s food exports to China have doubled in three years, and these days a quarter of all Iowan soybeans get exported to China. Branstad has no prior experience on matters of national security, though. He’ll be expected to play a key role in persuading Xi Jinping to cooperate with Trump’s efforts to deal with North Korea. For now, Branstad is the only ambassador to Asia whose name has even been submitted to the Senate. The Diplomat

Movers and shakers

  • HNA Group becomes Deutsche Bank’s No. 1 shareholder: 

Chinese conglomerate HNA Group has eclipsed members of the Qatar royal family and BlackRock Inc. to become the largest shareholder in Deutsche Bank AG. U.S. public filings reported this week show that HNA, the parent company of China’s Hainan Airlines, has increased its stake in the giant German lender to just under 10%. The company made the investment through C-Quadrat Investment AG, the U.K. subsidiary of an Austrian asset management fund. HNA had previously held 4.76% stake in Deutsche Bank, filings show. China watchers remain fascinated by HNA’s ability to continue making foreign acquisitions at a time when Beijing has clamped down on overseas deals by other Chinese firms, including established giants like Dalian Wanda Group. Wall Street Journal

  • Regulators lean on Anbang: 

Chinese insurance regulators lowered the boom on Anbang Insurance Group this week, barring the company from selling two insurance products and publicly admonishing its executives to “pay high attention” to its investment products and “fix the work on product development and management in strict accordance with supervision policies and requirements.” It was a stark dressing down for a company that, until only last year was one of China’s most aggressive overseas dealmakers. Under the leadership of its well-connected chairman, Wu Xiaohui, Anbang acquired New York’s landmark Waldorf Astoria Hotel for $2 billion in 2014. Last year it entered into a high-stakes bidding war with Marriott International Inc. for control of Starwood Hotels and Resorts Worldwide Inc. The Chinese insurer offered $14 billion for Starwood, then abruptly walked away from the deal without explanation. The company made headlines again in January with reports that it was in talks with the family of Trump adviser and son-in-law Jared Kushner to purchase a stake in a 41-story office tower on Manhattan’s Fifth Avenue. In late March, Kushner Companies said in a statement that it was no longer in discussions with Anbang about the property. New York Times

Technology and innovation

  • COMAC earns its wings: 

On Friday, China moved a step closer to its dream of competing with Boeing and Airbus in the global aviation market with the successful maiden flight of its homegrown C919 passenger jet. The C919 touched down at Shanghai’s Pudong International Airport after an 80-minute flight to cheers from dignitaries and aviation workers. The aircraft was made by state-owned Commercial Aircraft Corporation of China (COMAC) relying on technology from global firms including General Electric, Honeywell International and United Technologies Corp. The 158-seat aircraft, intended for medium haul flights, won't go into service for another two years. U.S. and European regulators need to certify the aircraft before it can fly commercially outside China. COMAC says it already has 570 orders from 23 customers. Xi Jinping’s “Made in China 2025” program has identified aerospace as among the sectors that should accelerate the development of China’s economy. Los Angeles Times

  • China’s bike-sharing blight:

 China’s bike-sharing industry, at first hailed as an example of indigenous innovation, has come under increasing attack in recent weeks for unleashing chaos in the nation’s cities. The bike-sharing boom is being blamed for a wave of vandalism, traffic violations and theft. Critics charge users of the bike-sharing apps are abandoning bikes on city streets, obstructing cars and pedestrians. The services are even being blamed for undermining China’s bicycle manufacturing industry. Part of the problem is that China’s newly developed cities have been designed for cars, not bicycles. But it’s also clear bike-sharing has proliferated faster than the ability of the services or regulators can manage it. About 30 Chinese start-ups now allow customers to rent bikes whenever they want from designated locations. The two leading players, Tencent-backed Mobike and Didi Chuxing-backed Ofo have raised hundreds of millions of dollars in funding. Ofo, only three years, old has raised $650 million, which the company says gives it an estimated valuation of $2 billion. Financial Times

A Tale of Two Cities

  • In Beijing, searching for China's soul:

Don’t miss this elegant love-letter to Beijing by veteran China correspondent Ian Johnson. It appeared earlier this week in New York Times under the headline “My Beijing: The Sacred City.” Johnson has just published an outstanding new book exploring the subject of religion in modern China. He admits he feared Beijing’s construction boom would crush the city’s soul. Instead, he finds culture thriving “in odd corners of the city and in unexpected ways.” Beijing may be the capitol of a very authoritarian state, but Johnson expresses grudging admiration for the government’s inventiveness in using public spaces to support traditional beliefs and bend them to its own purposes. New York Times

  • In Hong Kong, "I feel emancipated!"

You’ll find a very different perspective in this piece by Financial Times correspondent Jamil Anderlini, who moved to Hong Kong last year after many years stationed in Beijing. He admits that when he moved to China in 2000 to begin his career as a journalist, he looked down on Hong Kong-based journos for their cushy, “China-lite” lives, “filled with post-colonial attitudes and first-world comforts.” But since moving to Fragrant Harbour, he can hardly contain his delight. “I have joined the ranks of those I once derided – and I could not be happier,” he declares. “After the choking smog, permanently snarled traffic, tightly censored Internet, and poor food safety of mainland China I feel emancipated in prosperous, ultra-efficient and relatively free Hong Kong.” Having lived in both cities, both of these seemingly contradictory essays make perfect sense to me. Financial Times

  • Airpocalypse Now: 

As if to prove Jamil’s point, the pollution in Beijing this week has been horrific. My Time Inc colleague Charlie Campell reports that levels of PM2.5, the microscopic particles that can cause breathing and circulation problems and even premature death, "reached a staggering 630, while readings of the larger and similarly hazardous PM10 particles were off the scale at 1,000. The World Health Organization sets 24-hour mean safe levels at 25 and 50 respectively. I'm guessing that officials in Beijing can be counted on to do something to about that situation before guests for the “One Belt, One Road” conference arrive. Time

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