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Making the big transition

Updated: Sep 1,2014 10:41 AM     China Daily

Eastern city takes the lead in showing what is in store as China aims to move into the high-income club

Wuxi, a historic city on the Yangtze River Delta just half an hour by high-speed train from Shanghai, could be a vision of China’s future.

The Chinese government in its next five-year plan is likely to set a target of becoming a high-income country by 2020.

This would mean the whole country achieving a gross national income per capita of $12,616, more than double the 2012 level of $5,720.

The eastern seaboard city, which has been the focus of economic activity since reform and opening-up started in the late 1970s, is already past that goal. Its 11 million residents already enjoy a per capita GNI of $20,400, nearly four times the national average.

There are also villages within the Wuxi administrative region such as Huaxi, Jiuxing and Tengtou that are among the richest in China. These are where multi-millionaire entrepreneurs from Jiangsu province, whose enterprises stretch not just across China but also increasingly in Africa, have their luxury homes.

The area’s economy is to some extent built on light industry such as textiles, apparel, electronics and other consumer products. It is also the home of China’s Hollywood with Wuxi Film Studios now doing post-production for a number of US blockbuster films.

Jack Wu, 48-year-old president of Jim Brothers, based in the Lihu Science and Industrial Innovation Park, one of five industrial parks in the Binhu district of the city, says people now enjoy an almost Western lifestyle in the city.

His company, which employs 118 people, is an e-commerce business that makes bespoke shirts. Customers just need to send an emailed image of themselves from which their precise measurements can be calculated.

“Living and working here is certainly better than China’s major cities. There is less pollution, the environment is better and property costs are probably 30 percent lower than in Beijing, whereas income levels over the past three or five years have been actually higher than in the capital.”

The city’s main shopping malls, where there are designer brands and Western coffee shops such as Starbucks everywhere, certainly suggest a comfortable middle class lifestyle that would not be out of place in Europe or the United States.

Although the city remains very Chinese-with few foreigners in evidence-one indication that Wuxi is now on the map in consumer terms was Apple opening its 12th store in the whole of China at the Center 66 mall in the city in August.

Li Jinsong, general manager at the Phoenix Arts Group, which runs one of Wuxi’s largest art galleries, says wealth levels in the city have hit such a level that people are looking around for what to spend money on. Some of his collector clients spend up to $1 million on paintings.

“There is a group of people who have bought a home, they have a car, they own stocks and they are looking for something else to buy so they buy art,” he says.

Whether Wuxi is an example of where China is heading by 2020 is a matter of debate.

In Beijing, Zhu Ning, deputy director and professor of finance at the Shanghai Advanced Institute of Finance, actually hopes not.

He says there is a nouveau riche attitude in places such as Wuxi that is largely absent in more developed countries in the West.

“I think Chinese people who travel to the US and Europe have this strong shock when they don’t see this conspicuous consumption of flashy cars and expensive iPads. I think this is because what you have in the West is a more mature income distribution that prevents this.”

But Ruchir Sharma, head of emerging markets and global macro at Morgan Stanley Investment Management, based in New York, does not see pockets of wealth in places such as Wuxi as necessarily a problem.

“You always get inequality between regions. We all know that development tends to be much faster in coastal areas. That has been the experience of all economic development and it was true of the United States as well.”

The much bigger question is whether China will succeed in joining the high-income club and meet the target likely to be set in the 13th Five-Year Plan (2016-20).

Many emerging nations have fallen into the so-called “middle income trap” from where they have found it impossible to achieve full development.

This has been true of many Latin American countries, which suffered a major debt crisis in the 1980s and had to be bailed out by the International Monetary Fund.

Brazil, host of this year’s soccer World Cup and a large emerging economy, has never succeeded in breaking out of the trap, with many of its citizens living in abject poverty.

Russia and South Africa are other BRICS economies that are also not in the top league.

Justin Yifu Lin, former chief economist at the World Bank and professor of economics and honorary dean of the National School of Development at Peking University, is one who is confident China will meet the target of becoming a high-income country.

He believes that its economy has huge scope for fast growth over the next 15 years without even changing its existing investment-led model, which others argue might itself cause a bust.

His view is based on the fact that China reached a per capita income of 21 percent of that of the United States in 2008. Japan achieved that level in 1951, Singapore in 1967 and South Korea in 1977 and all grew at above 7.5 percent or more annually for 20 years thereafter.

“What drives income levels is an improvement in labor force productivity. This requires continuous technology innovation and industrial upgrading,” he says.

China, according to Lin, has what he terms a late development advantage in that it does not need to develop its own new technology but can just copy that which exists elsewhere.

“China has realized this advantage in its first 30 years of development after reform and opening-up and there is no reason why it shouldn’t continue to do so. It can innovate and upgrade its industry (and boost incomes) by imitating the technology of developed nations. It involves much lower costs and risks than developing its own technology.”

But some are not as confident as Lin that China will escape the middle-income trap.

Sharma, also author of Breakout Nations: In Pursuit of the Next Economic Miracles, believes there are big dangers in the government setting relatively high growth targets such as the current 7.5 percent to achieve high income status.

“I think the risks of China failing to become a high income country have gone up markedly in the last 18 months or so. I think the current growth targets are far too ambitious. The risk is of taking on too much debt to achieve that target. The economy is at risk of becoming dangerously unbalanced.

“There is an old saying, better late than never, and I think that particularly applies to China right now.”

Zhu, at the Shanghai Advanced Institute of Finance, also believes there are major risks and that the government should avoid targets for GNI per capita income.

“It has been setting a clear target for economic growth and I think it is now moving away from this and developing a GNI per capita mentality.”

He believes they would be better targeting the Gini coefficient, which measures income inequality.

China’s official measurement was 0.474 in 2012. The scale is from 0 percent for perfect equality to 1 percent which is completely unequal. Anything above 0.4 percent is high and some countries such as South Africa have consistent ratings above 0.6 percent. A survey by Southwestern University of Finance and Economics in Chengdu says China’s measurement was 0.61 in 2010.

“I think the real figure (for China) is probably somewhere near that (0.61), although it is difficult to assess. I think this is becoming an increasingly pressing issue for China.”

Back in Wuxi, Wu at Jim Brothers does not see too much evidence of the income inequality and materialism that many Chinese are now renowned for, such as buying up luxury brands in Paris and London.

“People say that young Chinese people are actually materialistic but I would say they were not. Sure, they want a nice apartment and a nice car but who doesn’t? I think they care about their future and the society in which they live more than what many think.”

Xavier Zhou, manager of the Sheraton Wuxi Binhu Hotel, says that if Wuxi is representative of how China will be in 2020, it will not be a place where people throw their money around.

The 44-year-old may be in charge of one of the city’s plushest five-star hotels with Chateau Lafite available on the wine list at around 4,000 yuan a bottle, but local residents have more modest tastes.

“They prefer wine at around 100 yuan a bottle,” he says.” People, in fact, come in for our Chinese and Japanese buffet at 150 yuan per person. We actually have to compete with all the franchise restaurants in the shopping malls.”

Zhou says the low prices might also have something to do with the competition in the hotel market rather than the income level of consumers. The room rate of 680 yuan a night for his premium hotel is less than many would pay in the UK for a Travelodge motel.

“I do, however, think people are more conservative in their spending here than people think. They probably prefer to save their money for healthcare or for their children’s education or spend it on other things.”

Li at Phoenix Arts Group, however, believes there is real evidence of people’s incomes increasing in Wuxi from their retail behavior.

The company-already established as one of the world’s largest fine art materials suppliers, with bases in Shuyang, Jiangsu province, and Ho Chi Minh City in Vietnam as well as Wuxi-set up a subsidiary selling fine art eight years ago.

“That business has grown 100 percent every year since we started. People are getting richer. They now buy an apartment and they want more than just a reproduction from a store to put on their walls.”