From Sandton to Shanghai

(Challenges of the Rainbow Nation. Copyrighted by Zapiro. Reproduced by permission)

Life in Shanghai is frequented by taxi rides. It makes sense. Taxis are cheap, cover the city and follow a relatively standardized process. Once in, the challenge that awaits you is to tell the driver your destination in pitch perfect Mandarin or get a blank stare in response.

Having hopefully been understood, the driver will inevitably comment on your excellent Mandarin. One gets over this language praise rather quickly. The utterance of only a couple of words in Mandarin generally gets fantastic reactions from most Chinese people. It is merely a sign of courtesy and should not be believed in a hurry.

Shanghai taxi drivers and for that matter taxi drivers in China’s largest cities have a relatively impressive, if simplistic knowledge of South Africa. If your Mandarin gets you further into the conversation, there is about a 95% chance that your newly acquired Chinese friend will say: ‘Yes - South Africa is the land of diamonds, Mandela and crime.’ Dig a bit deeper and ‘gold, wealthy country and beautiful scenery’ might come out too. I once found a guy that could even tell me our last 3 country presidents.

Crime is the disturbing stereotype though. ‘South Africa is a dangerous country, people get killed all the time there,’ is the common response. What I have realized is that the large number of ethnic Chinese living in South Africa - up to 300 000 people - are one of the reasons why such detailed news makes its way back to Chinese shores. Interestingly, because Chinese people living in South Africa are often perceived to be a cash-based society, they are specifically targeted and stories of gratuitous violence travel quickly back to Shanghai taxi drivers.

As a South African living in China, crime is a fascinating concept for me. I always explain away our terrible reputation in South Africa by saying that our country had a long history of institutionalized violence, our income inequality rates are dangerously high, we were ruled by and iron fisted government during recent decades and the social fabric of traditional societies have been largely destroyed.

Then after some thoughtful thinking on these points, I realized that the past 50 years in South Africa and China’s history were actually not that different. In South Africa it was called Apartheid. In China, Chairman Mao led the country through a series of violent purges culminating in the brutal Cultural Revolution. The difference is that now, South Africa is one of the most violent nations on earth and violent crime in China is ridiculously low.

Yes, China has the death penalty and South Africa does not. Ditto that South Africa is democratic and China is still ruled by the strong arm of the Central Communist Party - who still has much bearing on the day to day lives of its populace. But it is too simplistic to suggest that if South Africa became an autocratic-ruled, death penalty-driven country overnight that crime’s pervasive footprint would necessary alter substantially.

Authority is something to be respected in China and this has roots in strong Confucian values. It is not merely people respecting the emperor or designated leader of the day but a system of organising social relationships - sovereign to subject, parent to child, husband to wife and elder to younger sibling. In Mao’s quest to create an egalitarian society, he was initially dismissive of Confucian thinking but grudgingly realized its importance in self-ordering a billion-strong nation.

It is ultimately because of this authority that China can boast its long history. Power is not destabilized unless absolutely necessary and Chinese people will sometimes blindly follow this authority against superior individual moral judgment. When power is destabilized for whatever reasons, it is usually the result of a long series of weak leadership decisions where it is clear that China’s highest leadership clearly do not have the mandate of heaven on their side any more.

And this is where the difference comes in. China’s millenniums long culture and history provide a very stable long-term base beyond the short-term events that might seem so devastating at the time. When these destabilizing influences materialize, like the kind of changes that Mao wrecked on China for over 3 decades, there is an innate Chinese understanding that normalcy will prevail in the end for the simple reason that it always has.

Whenever I try to contextualize China’s turbulent last century, I always return to a quote from Nora Waln in her China-based book called The House of Exile: “I asked what this war was. Shun-ko’s husband answered: ‘It is not a war. It is just a period. When you are adequately educated in Chinese history, you will comprehend. We have these intervals of unrest, sixty to a hundred years in length, between dynasties, throughout the 46 centuries of our history.”

Returning back from a recent trip to South Africa, the biggest thing that struck me was how much of South African outlook was governed the prevailing issues at the time. It was a scary day to day existence with a wary eye cast on the future. People had such an uncertain idea of what challenges the next month would bring let alone what 10 years into the future held.

South African’s short sightedness has resulted in an extremely emotively-fueled and impatient country. Enough good trends happening at the same time create a rosy outlook into the near future, while the simultaneous occurrence of a series of negative events habitually plunge South Africans into a spiral of doom and gloom. Because our past was built on such a recent foundation, there is no way to contextualize these smaller trends within a larger and more reassuring framework.

In all of this, I am reminded of a Xhosa saying: “Ningadinwa nangamso” - do not get tired of tomorrow. For as soon as we tire of tomorrow we have nothing of importance to live for, no individual or national purpose to strive towards. At the moment South Africans seem to be tiring of tomorrow, whether it is the mobs fueling xenophobic violence across South Africa’s townships or the white South African families on one way tickets to Perth. Chinese people on the other hand are relishing in yearly increases of household income levels and consistently sustained double digit economic growth rates.

As Sir Francis Bacon once said, ‘Hope is a good breakfast but it is a bad supper.” Not only do South Africa’s leaders need to start making our dinner more attractive by serving up enticing menus for the future, but the present lukewarm breakfast is currently being served with tasteless flavours of crime, social disharmony and unimpressive leadership displays. In some cases, breakfast is not being served at all. And all of this news is filtering back to Shanghai’s world savvy taxi drivers.

(Platinum Ore. Source: DK Images)

Here is a straight forward prediction for years 2008 and 2009: A Chinese mining company will buy a minority stake in a major South African platinum mine.

China’s automobile production has skyrocketed in recent years. In Beijing if you are a successful government official you drive a black Audi and if you are a successful entrepreneur (or at least want your friends to think so), then your vehicle of choice is a black BMW. Driving a car is a great status symbol and the only difference with most of South Africa’s up and coming black professionals is that in China, you first buy your house, then a depreciating asset.

As China gets richer, so the local vehicle market is hotting up and major cities like Beijing are experiencing huge traffic congestion on roads that were predominated by bicycles a generation ago.

Shanghai is smarter on the car front. Firstly, people are happier to catch public transport as image is not as important is its political rival to the north. Elevated highways, sometimes 4 layers deep and stretching up to 10 floors above the hum drum of congested traffic lights spirit traffic along at a speedier rate. But probably the biggest deterrent is that while an entry level car will cost just over R30 000, you need to participate in an auction process to buy a Shanghai license plate. Without this you are relegated to driving along non arterial roads. At the end of 2007, buying your local Shanghai license plate was a whopping R55 000 - nearing double the price of your car!

China now produces in excess of 7 million cars per annum and is second only to the USA in vehicle manufacture. In 1999, China adopted the Euro 1 emission standard that required all domestically produced vehicles to be fitted with catalytic converters and almost all of China’s vehicle exports are to countries with emissions standards in place.

Currently, catalytic converters account for over 60% of platinum consumption. Only one Chinese mining company on the planet has a direct interest in a platinum mine and this is not even an operational development yet. South Africa has over 77% of the global platinum supply with 50% of this is processed locally.

While platinum was not one of China’s strategic resources, it is fast becoming more important as China powers up the global car manufacturing rankings. All this points to South Africa sooner than later…

After ICBC opened Chinese and South African eyes to a new world of investment possibilities, there must to be a number of large Chinese companies taking a closer look at South African service sector companies with a large African footprint.

There is not a huge amount to choose from that satisfy these criteria while allowing for a significant level of investment , but here are two companies to keep eyes your on:

MTN

MTN’s name has already been bandied about by the South African press as a possible target for Chinese investment. It has the widest coverage of any cell phone company in Africa, its making a lot of money on the continent and has a strong presence in countries where China has already invested significantly. These countries include Nigeria, Zambia, South Africa, Angola and the DRC.

Sanlam

(Click here for the a report on Sanlam’s Developing Markets prospects)

Sanlam is another interesting prospect. It has a presence in Botswana, Kenya, Ghana, Tanzania, Zambia and is looking at expanding into Nigeria. While Sanlam’s Africa strategy is not yet properly developed, it does have the potential for African expansion to suit a Chinese emerging market focus. The Chinese insurance sector has also recently seen the IPO of two massive companies and this has given them capital to burn. Of course, the Chinese sector has much room for development, but China’s insurance heavy weights will already be contemplating international strategies.

(The old and the new of Shanghai. Our first apartment is in the distance. Photo: Julian Hewitt)

Bordering the East China Sea on one side and flanked by the Huangpu River on the other is Shanghai’s Pudong District. For all intents and purposes, Pudong is the golden child of the Chinese economy. The reason for this is that it does what no amount of facts, figures, GDP growth rates and statistics can ever do – and that is quite simply that Pudong puts a face to China’s economic miracle.

Go back 15 years and Pudong was essentially a smattering of low lying buildings and a collection of small scale agricultural plots supplying fresh produce to the city. Fast forward to 2007 and Pudong’s riverfront vista has to be one of the most impressive skylines in the world. Take Johannesburg’s tallest buildings and you would need to double their height to get a proper sense of Pudong’s scale.

Stare across the river at night and a rocket-like TV tower adorned with giant red spheres rises almost half a kilometer into the sky. Its impressive structure is bathed in light to capture every ounce of your imagination. To its right two massive skyscrapers compete for attention. The Jin Mao Tower stands at 88 storeys and has recently been eclipsed as the 95 storey World Financial Centre nears completion.

Someone one said that Pudong’s rice paddies were watered with money and it is a great metaphor to describe the frenetic-paced development taking place here. This really struck home when I recently tried to locate our flat using Google Earth’s satellite imaging. Instead of a huge complex that housed over two dozen, 30 storey apartment blocks, I found a vast track of dusty land and an old Chinese community nestled in the top corner.

The image on my computer screen had a rather surreal museum-like quality to it, and I felt a compulsion to locate other Shanghai landmarks I knew had not escaped the passage of time. Whole blocks of Shanghai’s old town replete with mazes of alleyways and old men playing Chinese Chess on the side of the road now stood in forlorn states of demolition. A massive swathe of industrial land between Shanghai’s bottom two bridges has been completely flattened to give way to what will blossom into the city’s 2010 World Expo venue.

It seems that Shanghai’s history is measured in months and years, not decades and generations. It’s the sort of change that affects living here on a month to month basis. For example, when we first arrived in the city, a gravel road connected our flat to my wife’s business school. Now, a brand new 2-lane highway has taken its place. The metro line I travel on everyday has been extended by 4 stops and a brand new line bisects it one stop up.

But it is the sheer scale and ambitions of the city’s development that I find most exciting. Shanghai’s 4000 plus skyscrapers already exceed that of New York City. The city’s 130km long metro line has another 400km in the planning or construction phases. The total figure will soon surpass the length of the London Underground. At the same time, the world’s longest trans-oceanic bridge is currently under development between Shanghai and the major seaport of Ningbo to the south. The 36km long bridge will reduce the current 4 hour journey to 1 hour.

To try and get a sense of the city’s dynamism, I enjoy frequenting a coffee shop alongside the Huangpu River to absorb myself in the many facets of the fascinating vista in front of me. The Huangpu is definitely no Riviera, so there are no yachts, no cruiseliners and no private jetties to be seen. It is a dirty, muddy coloured working-river punctuated with a plethora of barges going about their daily coal carrying, ore transporting duties.

The river makes for a perfect canvas to describe Shanghai. On the Pudong side, the massive skyscrapers and one of Asia’s most important financial hubs tower over the river. On the opposite bank, the elegant sophistication of classy sandstone buildings point to Shanghai’s strong colonial influences. In one panoramic view, Shanghai’s cosmopolitan past, industrial present and aspirational future make for rather odd acquaintances that merge into the city’s present.

If you go beyond the glitzy shopping malls and watch the city at work, whether it is the investment bankers in Pudong or the huge informal recycling community, you can start to tap into the essence of the city. What Shanghai does have in large doses is the kind of edgy energy than seems to punctuate some of the most dynamic cities in the world.

It is the same raw energy that you will find it in places like Johannesburg or New York City. Like Shanghai, these cities are melting pots of civilizations that attract people from far flung corners to play out their greatest dreams, or at the very least, to be standing in the theatre of those more fortunate.

There can be something quite disconcerting about watching the world change in front of your eyes. I like to call this the privilege of change – the opportunity to quite literally watch a society transform in front of you. I was lucky to live through South Africa’s political transformation and now I am living in the middle of one of the greatest economic miracles in modern times.

Despite all the paradoxes that change brings, there is one thing that I am certain about in Shanghai. While money does not grow on trees, it can do wonders for dusty tracks of land and rice paddies…

(Because this cement plant is on a tourist route near the Yantze River, plans are afoot to move it a couple of valleys along. Out of sight… Photo: Julian Hewitt)

Much has been said about China’s political and economical challenges. The reality is that China’s biggest challenge will not come from either of these tightly controlled and well managed aspects of society. China’s biggest problem will be environmental.

Mao once famously said that a revolution is not a dinner party, and the Industrial Revolution that swept across the Western world in the 18^th and 19^th centuries was by no means a pretty affair for the environment. The Industrial Revolution gave rise to great fossil fuel-guzzling, coal-burning factories that massively increased air pollution and chemical discharges.

China’s industrial revolution is hardly a walk in the park either. The difference is that Britain industrialized a population of less than 20 million and the USA went through the same process with under 100 million. China is walking down the same path, but with 1.3 billion people and it is doing so under the microscopic scrutiny of the West.

There was no internet, Greenpeace, Al Gore and Kyoto Protocol to maintain accountability 2 centuries ago. Nor were there delicate trade issues to consider. When a Dutch research team recently announced that China had overtaken the USA on the pollution stakes, it was splashed across the American newspapers, but received scant attention here. China rightly claims that it has 4 times the population of the USA and most of its industrial output ends up in the American homes anyway.

However, there are different issues at stake. China has more localized problems to be concerned about. There has been a rash of publicity regarding defective and hazardous Chinese products hitting international shelves. A few examples include contaminated toothpaste, deadly dog food, and according to the New York Times, seafood that was stopped 391 times at the USA border last year. Essentially, what were isolated issues has now become a serious bout of negative publicity for Chinese foodstuffs

These problems have found their way back to South Africa, right to the doorstep of my hometown. High levels of cadmium have been discovered in South African pineapples after local farmers unknowing used contaminated Chinese fertilizer. Shipments of canned South African pineapples have subsequently been rejected by the EU, after they were found to contain high levels of lead, arsenic and the carginogenic cadmium.

Bear in mind that for every case of contamination reported overseas, there are hundreds more happening on a daily basis in China. Addressing defective products is not that complex. What is required are many more balances and checks – tighter legislation, greater consequences for overstepping the boundaries and increased manpower to monitor product safety standards.

In a sign of growing urgency, the former head of China’s Food and Safety industry watchdog - Zheng Xiaoyu – was recently executed after being convicted of taking bribes to register substandard medicines. These inferior medicines resulted in the deaths of at least 10 people. Much attention has been given to this landmark case. To put it in a more Chinese way, it was a question of killing the chicken to scare the monkeys away.

The real challenge is to address the causes and not the symptoms though. While superficial issues rage around the global media, China has a much bigger fire looming in the background. The problem is not a complication one. China is still largely driven by manufacturing output. The manufacturing sector has large energy requirements as inputs and large amounts of effluents are discharged into the environment as outputs.

If this process is not competitive, then business moves to Vietnam, Myanmar or India. Using coal for energy is less expensive than sustainable energies and discharging untreated chemicals into the local river is cheaper than treating them.

However, when a massive lake has been so polluted from industrial discharges, that huge swathes are covered in a poisonous algae and the adjacent city of nearly 5 million people can’t even boil the water to make it potable, then your environmental challenge becomes a question of social harmony.

When this same incident repeats itself in nearby lakes and affects other large cities, then these isolated incidents soon become trends. This then leads on to a question of priorities. What is more important – a city with high economic growth or one with lower growth but where you can at least drink the water when you have boiled it.

The big issue at stake is that environmental challenges are less predictable than next year’s economic growth rate, next month’s trade surplus with the USA, the appreciation of the Chinese currency or even the next country president. Less predictable means less manageable and therefore more risky. The next outbreak of SARS or the next occurrence of poisonous algae has a much more direct impact on the man on the street than next month’s global trade figures.

(Shanghai’s impressive skyline viewed from the lofty heights of the Jin Mao Building Photo:Laurette Moolman)

Time to Return the Compliment

For too long, South Africa has viewed China as a nation of cheap textiles and import quotas. There are much bigger opportunities and threats to grapple with on the very near horizon. China has a pragmatic view of its relationship with Africa and it is time we returned the compliment.

When Standard Bank issued a recent cautionary that a transaction of material nature was soon to be announced, it was clear that a big shake up was headed the way of the South African banking industry.

A big deal was afoot. For it to be material, the imminent investment had to be over 25% of Standard Bank’s R150 billion market capitalization. The money market soon provided further clues. Since the notice was publicized, the Rand had strengthened considerably. It was a sure sign that the market was already pricing a foreign purchase into Standard Bank.

Standard Bank and ABSA have the largest African footprint of South Africa’s Big 4 banks, but ABSA had already been snapped up by Barclays. Most American and European banks were still recovering from the sub prime mortgage debacle and were in no mood for international acquisitions. It looked like a Chinese bank was in the running.

Since ABSA was already under foreign ownership, the Competition Commission loomed as a large obstacle for any company braving a majority purchase in Standard Bank. Chinese suitors have access to money and not international management expertise, so a minority stakeholding was most likely.

Armed with these facts, 2 days before the official announcement, it would have been possible to make an informed prediction that a Chinese bank was buying a minority stake in Standard Bank.

A Lesson in Pragmaticism

In a similar lesson in pragmaticism, any rudimentary analysis of mining opportunities in the DRC would have pointed to the fact that it would have had to be high on China’s wish list. After all, the DRC has the largest untapped mineral resources in the world and had a complete lack of infrastructure to mine it.

This was the perfect situation for an increasingly risk averse China with regards to exploiting mining situations in Africa. Given that China already has significant oil and raw material investments from Sudan and Zimbabwe to the most unstable parts of Nigeria and Ethiopia, a sizable investment in the DRC was only a matter of time.

Again, when China announced a USD5 billion mining development and infrastructure package to the DRC, the world seemed to have been caught off guard.

Rather than be astonished by China’s foreign investment strategies, it is essential for South African decision makers to step back and look at the situation from a rational perspective.

China’s first wave of investment in Africa was state-driven around national interests and focused on developing sustainable supply lines for oil and energy extraction. South Africa was largely left out of this investment loop as Chinese money flowed into Nigeria, Angola, Sudan and Zambia. In many ways China was a direct competitor to South African mining and construction companies with an African agenda

China has a very comprehensive investment plan for Africa. It has already invested heavily in continent-wide mining, construction and infrastructural projects. China’s assumption is that this will also equate to a bottom line impact on the economic development of the countries being invested in.

As it is, Africa’s recently strong economic growth rate is riding the wave of a largely Chinese-fueled commodity boom. Higher growth rates are supporting increased household spending on goods and services. South African companies boast a significant African footprint and are in a prime position to benefit for this. From China’s viewpoint, they make for attract investment vehicles.

The Second Wave is just Beginning

The second wave is just beginning. Massive Chinese state owned enterprises are listing for the first time. In the space of 5 years, the global capital market has shifted from New York to Shanghai and Hong Kong, buoyed by a rampant Chinese stock market.

Make no mistake of the size of these Chinese companies. Their market capitalization might be propped up by over exuberant mainland investors, but Standard Bank’s new partner – ICBC – is 60% larger than its closest USA banking rival. Keep in mind that China has 1.3 billion consumers to tap into - 400 million of whom own cell phones and another 100 million who surf the internet.

These huge enterprises are cash flush from recent listings. They have capital to burn and global ambitions to pursue. While most companies still have significant government ownership, the second wave of Chinese investment is driven by business opportunities.

For shrewd local investors and local business leaders, it is crucial to weigh up two important facets. Firstly, keeping tabs on big Chinese IPOs is important as this will inform the source and sector of future global and South African investments.

Prophetic Insight

Secondly, an analysis of South African service sector companies with a large African presence is essential to predict future Chinese investment patterns. Linking these companies and their sectors to their respective listed Chinese counterparts will provide prophetic insight.

ICBC’s investment in Standard Bank was the biggest international investment China had ever made. If Sasol’s USD6 billion Coal to Liquids programme sees the light of day in China, it will be the single largest FDI into the country. As a relatively small economy, South Africa has the scope to play a surprisingly influential role attached to the coattails of an emerging economic giant.

We do however need to get closer to the action and be less surprised by the possibilities that are emerging from China. A rather large second wave is already hitting our shores.

From Sandton to Shanghai

Julian Hewitt
11 April 2007 11:59

Yesterday started with a walk to our local expo centre - the one whose white, wave-like roofs catch my eye very time I stare out at the view from our 20th-floor alcony.

Normally, a R10 taxi ride would have sufficed to get to the expo centre in Shanghai. There is something eeply gratifying about walking to a place when you now other people would have travelled across the world to get to the same spot.

Business people from around the world make the long lights, expensive hotels and jet lag part of the price ag to get into the city now at the centre of the world economy.

After a scenic riverside walk, we arrived at our destination half an hour later, showing our international passports to get in free of charge. The trade fair is one of Shanghai’s largest and one that fills up every inch of space that nine aircraft-hanger-like halls can offer. Last year, the six-day fair brought in USD3,3-billion (about R24-billion) of business, not far off the GDP of many African economies.

Walking through rows and rows of consumer goods, sports equipment, ornaments and clothing, it was easy to start imagining the same products lining the shelves of Clicks, Mr Price and Cardies back at home. The Chinese mean business and this is a place of one-stop deal-making. Not only can you purchase just about any consumable the Chinese economy can deliver, there are fancy restaurants to charm the buyers, meeting rooms to
negotiate the deal, translators to bridge the language divide, legal services to
help with contracts, police offices for disputes and freight companies to get the
goods safely home.

Later, we found ourselves in a much smaller school hall helping to sort out clothing donations from expats that were being boxed up and sent to far away, poverty-stricken Yunnan Province. These are just some of the contrasts that make up daily life in Shanghai.

It was not that long ago that I had the idea of moving from our Sandton home to live in Dube, Soweto. I wanted to experience a different dimension of our country. My Zulu was conversational at best, but I had spent time working with a number of primary schools in Soweto and felt drawn by the strong sense of community.

But Wayne Gretzky, Canada’s renowned hockey player, once famously said that the trick is not about skating to where the puck is, but rather skating to where the puck is going to be. And, from a South African point of view, China looked like the place to be heading to — not only is the world becoming a smaller place, but China is playing an increasingly bigger role in the global goldfish bowl.

And so, instead of Soweto, my wife and I have now been living in Shanghai for half a year. As opposed to brushing up on my Zulu, I have been studying Mandarin at a top local university for the past semester. It seems like two incompatible decisions — Shanghai or Soweto — but life nowadays is all about dealing with paradoxes. In this case, it was a question of balancing local knowledge and global awareness.

While China is part of the daily business news in South Africa, while companies like Sasol, SABMiller and Naspers have made big strides in China and while Africa is a big part of China’s global picture, the bridges that straddle these divides are not very wide. Take Shanghai as an example. Shanghai is a city of 20-million people and the financial face of China. In the whole city, there are a total of three South Africans studying at local
universities and, at a guess, less than 10 young professionals making a career here.

On the governmental side, although South Africa has good relations with its Chinese counterparts, I have been told that there are few if any Mandarin speakers in either the department of trade and industry or the department foreign affairs.

Compare this to Australia, which has a whole team of Mandarin speakers working within their governmental trade negotiation unit. Perhaps we are catching up. In July this year, the first employees of the department of foreign affairs leave Beijing as fluent Mandarin speakers after an intensive language programme.

But the point remains: for all the opportunities that China opens up to South Africa, and for all the challenges it poses, there is much scope for us to learn the language and understand the business and cultural aspects of a society that is rapidly shaping international affairs.