China wastes no time in expanding - Mario Cavolo

+Mario Cavolo 

China actions to fight Ebola, setting up a 100-bed facility in 30 days in Liberia, was one of the recent examples the country is not wasting a lot of time in getting things done, whenever it has made up its mind. Author Mario Cavolo of China: The Big Lie?: The Truth of Trillions in a Culture of Cash dives into the factor speed of China´s expansion.

Mario Cavolo:

China gets things done and gets them done fast. As I read in author Jason Inch’s book, China Supertrends, it took 8 years for the new airport in London to be completed at double the planned budget, while China routinely completes such super modern airport terminals in half the time at half the budget. There are countless other examples of how in China, bureaucratic red tape and bipartisan politics seem to stand far less in the way of growth, progress and expansion. 

So can we say Chinese leaders and Chinese companies are sitting on their heels or resting on their laurels? Certainly not. China’s expansion, reforms, and challenges can be regarded as mega-level at the very least. Both domestically and internationally, in terms of economics and politics, what is happening on the China front matters more than ever to the world. And on the development front, we have countless examples of how China is a full speed ahead train steaming down the tracks, regardless of the many problems in tow that have to be dealt with. 

China’s private sector is wasting no time. With 70% of businesses across China being millions of SME’s, the private sector is now the largest % contributor to GDP. Exports are down to only 11% of GDP from 23% in 2004, manufacturing is a declining % of GDP, ergo, China’s growth is less impacted by any slowdown in those areas offset by the rise of the domestic economy elsewhere. Looking at business reform measures, March 2014 saw the passing of much easier rules to register both domestic and WFOE companies, with as low as zero capital requirements, making it even easier for Chinese households to turn their business dreams into reality. Liberal tax laws with respect to deducting a variety of expenses against business income make registering your own business a very attractive option able to be run out of your home with minimum expenses. 

Next week, the mainland and Hong Kong stock exchanges will be linked, creating the world’s 2nd largest exchange behind the NYSE, making it possible for international investment into mainland stock exchanges including the Shanghai Exchange. Drop in the continuously expanding yuan currency trade with Sydney the latest international yuan hub on the heels of Seoul, Paris, Luxembourg, London, Franfurt, Singapore, Hong Kong and isn’t there a massive ICBC bank in Manhattan a couple blocks from the General Motors building the Chinese purchased? What we have here is a “reality TV” view of global revolution and evolution that is hard to keep up with.

More in Mario Cavolo´s weblog.

Mario Cavolo is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers´request form.

Are you looking for more experts on innovation at the China Speakers Bureau? Do check our recently updated list.

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Why China is not poor - Mario Cavolo

+Mario Cavolo 

Author Mario Cavolo of China: The Big Lie?: The Truth of Trillions in a Culture of Cash explains in the China Economic Review why China and the Chinese are less poor than many expect. China has a cash economy, he argues, where trillions are hidden from the eye.

The China Economic Review:

What is the “big lie”? 

The “big lie” is the misunderstanding that China is poor. The degree to which we think that we should follow and believe, and therefore forecast, on official statistics that we typically hear from governments and institutional analysis-type organizations. We hear the information about things like China’s annual per capita income is US$3400 per year, and the Gini coefficient is double what the Gini coefficient of the United States is. Fortunately, a deeper look shows that that simply isn’t the case. 

Your book discusses the emergence of this shadow cash culture that you’ve estimated at US$6 to US$10 trillion. Could you explain how and why this culture has developed? 

I want to first point out the idea that in fact it hasn’t emerged as something new. And that’s a big part of the misunderstanding. China for the last couple of decades, if you talk to any Chinese person or businesspeople, has very much been a cash culture. And so much of that cash culture is in fact off the books by its very nature. We can talk about the negatives of course. For example, when you have such a large cash culture, it makes all kinds of corruption a lot easier. But the positives are that it is a huge economic force that no one is including when they’re doing their analysis and forecasting and estimates of what GDP is in this society. 

So with your estimate of US$6 trillion you’re not looking to put a precise figure on this cash economy –  it’s more that you want people to understand just the enormity of what’s going on, and you’re trying to give a figure  that is in some way acceptable to the public? 

That’s right. And we do have some references to work with on that. We have the reference from Professor Wang Xiaoli with the China Reform Foundation, who in 2010 worked with Credit Suisse. Now, Credit Suisse, working with Professor Wang, produced the first official report on China’s shadow economy. The reference on that also would be Dr. Edward Feige from the University of Wisconsin, who’s the world’s most famous researcher on shadow economies, and who talks about how in the United States the shadow economy is US$2 trillion. And we’re not talking about the black economy, or illegal things. The gray economy is the shadow economy of workers who are working off the books, and this money is not being reported to Uncle Sam. So we’ve got US$2 trillion in the US, and that’s relative to GDP of US$16 trillion. In China, let’s just call it US$10 trillion of GDP. And even Credit Suisse at that time estimated the lower range of what I’ve said, which is US$6 trillion, as being the size of China’s shadow economy.

More in the China Economic Review.

Mario Cavolo is a speaker at the China Speakers Bureau. Do you need hi at your meeting or conference? Do get in touch or fill in our speakers´request form.

Are you looking for more financial experts at the China Speakers Bureau? Do check our updated list here. 

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Real estate problems are limited in size – Mario Cavolo

+Mario Cavolo 

Most media are hyping up the problems in China´s real estate, argues author Mario Cavolo on his website. Fortunately, he finds support in articles in the Wall Street Journal by Nicole Wong and in research of CLSA.

Mario Cavolo:

Problems in China’s real estate market are not broad-based. Much of the excess overbuilding is taking place in China.s 3rd tier cities, two of which I happened to visit myself in the past week, Jinghua and Huangshi. Both lovely cities of 2-3 million population with new development zones expanding a few years ahead of the game. Is this a reason for caution, a slow down? Sure. A catastrophe or collapse? Not even close, stop those silly media-hype notions.

Why? Let’s do some comparisons. In the U.S., the vacancy rate for such properties is 10%. In China it is a much higher 15% and Nicole’s team suspects it will rise to 20% in coming years, reflecting too much spending on property rather than other assets. But since we know that Chinese have far fewer other choices to invest compared to the west, I don’t view this as much of a surprise or red flag. Chinese view an 80sqm empty concrete hole with a long term view, much as a bar of gold. It is simply a store of assets. It sits there,  it may or may not become 100% occupied, it is not mortgaged to the hilt, it will be passed on to the children. Considering also, the deeply rooted behavior of Chinese married couples always starting their lives with their own newlyweds home purchased by the family, this should come as no surprise. Much of this behavior driven by core societal values, not speculative investment, giving us a far more sustainable view for the long term health of the real estate market. While lots of people in the west own stocks as a core asset, for example, few Chinese do. It is understood that Chinese stock exchanges and listed companies are far less reliable and transparent than their counterparts in the west, so they shy away from such risk and volatility.

Last year, new home purchases in China totaled 12% of GDP, double the 5.9% ratio found in the U.S. building boom of the 50’s. Why is this not a worry at all? Because there is no comparison between these two historical economic booms. Compared to the post world war U.S.boom the China expansion is ten times larger in scale, driven by a population of 300-400 million rising middle class. The U.S. boom in the 50’s was driven by a far smaller population during a time in the world in terms of technology and innovation which could easily be called ancient. Did we even have fax machines back then? If you consider the sheer massive scale of China’s expansion and urbanization in today’s world the numbers can be recognized as far more reasonable than concern for disaster.

More on Mario Cavolo´s website.

Mario Cavolo is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers´ request form.

Are you a media representative and do you want to talk to one of our speakers? Do drop us a line.  

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China: poor according to whose standards? - Mario Cavolo

Mario Cavolo

How rich is China? Many number crunchers have discussing that issue over the past few weeks. But the assumption China is a poor country, displayed in a blogpost at the Guardian, is certainly not true, writes an angry China veteran Mario Cavolo on his website.

Mario Cavolo:

[

Let’s look at China’s millions of poor, miserable street vendors, the ones we are supposed to feel sorry for because they only earn a few hundred dollars a month; many are actually earning more like $1500-$2000/month, all in cash. We know those same street vendors have admirably low daily living expenses and once again, NO mortgage or extremely low rent and other budget expenses.

We also know that over the past three years alone, China’s rising lower-middle classes have purchased 60 MILLION mid-priced automobiles, 80% of which were paid for in cash. Another 20-25 million will be purchased in 2014. Note that I am not talking here about the rich people buying luxury cars; only one million luxury cars were sold in China in 2013.

Poor by living standards?

China has 300 million rising middle class earning more than ever even after adjusting for inflation, and with 90% of households owning their home, on which the majority have NO mortgage and are worth across China’s 2nd tier cities $150-$200,000 dollars. Many of those families in fact, owned more than one home and sold one of them off, now holding that money in the family bank account.

Ah, so then we must mean the poor farmers. After all, there are 600 million of them scattered across the countryside and they’re all poor, right?

Except that the farmer family we visited this past weekend has 40 private customers for whom they provide a home delivery service into Shanghai; they deliver 4 kilograms of fresh off the farm vegetables each week 50 weeks per year for a monthly fee of 350rmb. Let me help, that’s 14,400rmb per month/US $2300.  One might agree its not a stretch to suggest that 20% of the farmers across China who possess a sense of entrepreneurial spirit to earn extra income, all have similar, extra income streams we are not privy too. When you visit their farm, indeed, it seems a rather messy, unkempt place and might still believe they are poor; until you find they live in that three story villa 300 meters away. There is much reality beyond what the eye can see.

That’s another thing about the farmers; why do so many of them live in really nice 3 story farmer houses if they’re so darned poor? I mean, seriously, it seems everywhere you look across China’s farm country, the farmers live in private 3 story villas, which by the way, they built themselves at a cost of around $15/sq ft. Is there fancy wallpaper? No. Is the furniture from Ikea or LazyBoy? No. Do they care about that? No. Is it an easy life? No. Ah, but are they poor? We cannot buy into such generalizations. Yes, many are poor while many are obviously not.

More at Mario Cavolo´s website.

Mario Cavolo is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch, or fill in our speakers´ request form. Are you a media representative and do you want to talk to one of our speakers? Do drop us a line.    

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A day in the life of Mr. Wang - Mario Cavolo

+Mario Cavolo 

Next month Mario Cavolo´s book ´The Big Lie" will appear in the US, and ahead of the publication his weblog publishes excepts of his book. An " imaginary and obviously unrealistic day in the life of a typical middle-class man living an ordinary life in Shanghai".

Mario Cavolo:

Sunrise greets us once again, leading us out the door at eight a.m. from Wang’s 900-square-foot, 3-bedroom, third-floor walk-up, which rents for RMB 3,000 (US$500) per month. Mind you, that is pretty cheap, but only because Mr. Wang does not live in prime downtown Shanghai, where rent for the same type of older apartment would be closer to RMB 5,000 (US$800). Note that I did say three bedrooms, as Mr. Wang’s cousin lives in the third. This type of sharing is the rule, not the exception, in China, leading me to tell you that I estimate the average range for rent per person to be RMB 625–1,350 (US$100–200) per month. 

It is a briskly paced ten-minute walk to the subway or public bus, which awaits at a cost of RMB 5 (US$0.50) for a 30–40 minute transit to work; Wang makes a five-minute breakfast pit stop along the way at one of many street vendors selling RMB 2 (US$0.25) veggie- or meat-filled steam buns or a Chinese-style fast-grilled pancake with an egg in it, along with a container of milk or soy milk at RMB 1.5 (US$0.20). He checks his watch on arrival and exclaims, “Wa! I’m running late!” so instead of walking, he hops on the back of one of the many (illegal) motorcycle taxis or tricycle carts for RMB 5 (US$0.50) to arrive at work in five minutes instead of the usual fifteen. Alternately, Wang could live it up a bit and hop a taxi to work every morning for RMB 30 (US$5). Better yet, if Wang is fortunate enough to work for one of the many regional or national-sized companies who offer shuttle bus pickup/drop-off every hour from 8 a.m. to 10 p.m., the cost of his commute drops to zero. That’s quite a benefit, as a result of which Mr. Wang’s main means of transportation in his personal life is an old, rusty bicycle, which he won’t replace with a new one because a new one is more likely to be stolen—no car is necessary.

The rest of Mr. Wang´s day at Mario Cavolo´s website.

Mario Cavolo is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers´request form. 

Are you a media representative and do you want to talk to one of our speakers? Do drop us a line.

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Why the BBC got me angry on another crash story - Mario Cavolo

Mario Cavolo

The story China is collapsing, or in a minor variation crashing, seems to be inevitable. Author Mario Cavolo got upset about the latest ´crash´story from the BBC and decided not to ignore it, but got angry, on his weblog. "Oh good grief, here we go again."

 Mario Cavolo:

Oh good grief, here we go again. On a daily basis I count sheep and count fools. Every night I count sheep because it puts me to sleep and every day I count the fools who just don’t get China with nothing better to do than paint the one-sided negative picture for all the world’s curious eyeballs. Robert Peston has joined the party and I am forced to offer an apology to Robert because my criticism is not personal. Its just my disgust at reading another one-sided, pointless article on China which apparently also tells us there is an equally pointless new BBC TV show titled This World: How China Fooled The World, trying I suppose to distract us from what we really should be worrying about, whatever that might be. But it sure isn’t China’s domestic economy. 

How China is fooling the world is with regard to anyone in the world who doesn’t yet get how strong China’s domestic economy is. What we read in this latest BBC article is the same old, worn story of China’s high debt levels and reliance on infrastructure spending and investment to grow the economy. ... 

I’m not suggesting China doesn’t have too much debt. Nor am I suggesting that we shouldn’t expect a continued slowing down of China’s economic growth in coming years. However, I’ve said it again and again. When it comes to economic strength, the last place on planet earth anyone should be worrying about it is China. And so to suggest “a serious risk of a calamitous crash” is, well, just foolish.

More at Mario Cavolo´s website.

Mario Cavolo is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers´request form.

Are you a media representative and do you want to speak to one of our speakers? Do drop us a line.

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Secret sin: Yang´s dumplings

Wang´s fried dumplings

They are unhealthy, cheap and dirty but an unavoidable delicates, when I´m in Shanghai: Yang´s dumplings. Author Mario Cavolo, one of our speakers I met the other day, dedicated a paragraph of his upcoming book on the hidden trillions in fortunes of China´s middle class to Yang.

Mario Cavolo:

...One such shoddy restaurant shack along Wujiang lu was the original location of “Yang’s Dumplings”, in Chinese known “Xiao Yang Shen Jian”, which are pork- filled dumplings fried crispy on one side only in a big, round, flat cast iron pan. Mr. Yang’s shack seemed to have a perpetual line of customers seven days a week and my friend Jeff recalls the day he decided to sit across from Yang’s shoddy shack to actually count how many orders went out in an hour’s time. His count was around 300. Back to Sherlocks’ use of deductive reasoning and calculation, I safely conclude that Mr. Yang’s dumplings sells at least 1000 orders per day seven days per week at 4rmb – USD $75 per order. That revenue totals 120,000rmb or USD $20,000. The space was no larger than 15 square feet, so the rent could not possibly be more than $750-$1500/month and the cost to pay six full time employees at $300/month each equals $1800. Finally, we assume a standard 30% food cost; add up all those easily recognize expenses to less than 68 $10,000/month, leaving at least $10,000/month in profit, year after year. Not, I gather, what most of us were thinking when first pondering a tiny, old, hole in the wall dumpling joint of which similar hundreds of thousands of dumpling and noodle shops are scattered all over the country.

Yang´s Dumplings have meanwhile proliferated all over Shanghai. I have seen outlets at Nanjing Xilu, and Zhongshan Park and a few other places. It only reenforces Cavolo´s argument, as their earning power has increased.

+Mario Cavolo 

Mario Cavolo is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference, do get in touch of fill our speakers´ request form.

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How chicken brought the Wang´s a fortune - Mario Cavolo

+Mario Cavolo 

China´s middle class, not only the very rich, collected trillions in savings, hidden from the formal economy, argues the author Mario Cavolo in his bestseller. On his website he explains how the Wang´s saved their fortune by simply selling chicken on the street. 

Mario Cavolo:

Meet Mr. & Mrs. Yang, they’ve been quietly, simply, diligently making a daily profit of 1000rmb/USD $165 per day five days a week for over a decade, not a dime of it reported to the government. Now wash, rinse, repeat millions of times along China’s merchant-lined streets to finally have an understanding of what’s really going on in China. 

I first met the Yang’s in 2002 when I lived in the Jing An district of Shanghai and regularly stopped at their “hole in the wall” street spot to pick up a 10rmb/$1.50 order of their tasty “jiaoyan de” chicken tenders, tossed with fresh minced garlic, green onion and chili peppers. I moved away for several years and having a corporate client in the same neighborhood this year, I always stop by to pick up an order when I’m in the neighborhood. 

Having a long time friendship and trust with them, I inquired in a friendly conversation with the Yang’s last week that went like this: 

Mario: “So, Mrs. Yang, how many of these chicken tender orders are selling each day, 200 or more?” 

Mrs. Yang: “At least…200 to 250 on average, sometimes 300.” 

Mario: “Nice! Your cost is around 50%?…profit around 5rmb each?…that’s not bad.” 

Mrs. Yang: “No, no, only 3rmb profit ($.50) per order, look at the other expenses, the gas, the oil, it adds up, and we don’t want to charge too much. And don’t forget we also sell these whole chickens at around 20rmb each, we sell 50/day and make 5rmb profit on those.” 

So there you have it plain as day, right under your nose and every other cliche we might consider with respect to a China reality check. 250 x 3rmb = 750rmb plus 50 x 5rmb = 250rmb totaling 1000rmb per day profit. The funny thing is I sense that many of us perhaps were thinking that their total revenue per day was around that 1000rmb per day. Now, having done plenty of similar street side research in the past two years, their answer was right in line with what I expected. They are in fact taking in 3x more revenue and profit than most people might consider. 

Keeping in mind this story has its start 12 years ago, one might begin to imagine how much money they have diligently accumulated over the years.

More at Mario Cavolo´s website.

Mario Cavolo is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers´request form.

China Weekly Hangout

The +China Weekly Hangout is expected to resume after Chinese New Year. Until that moment we use our scarce free moment to discuss how we can improve those online gatherings. Last week +Paul Fox, +Chao Pan, +Dashan 大山 and +Fons Tuinstra joined a first exchange on how the hangouts can be done better in 2014.

 

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Meeting the Wharton Club of Shanghai - Mario Cavolo

Author Mario Cavolo had a book signing event at the 2014 New Year part of the Wharton Club of Shanghai, where his book got a raving welcome, he writes at his website. "The first book digging deeper into the shadow economy of China's middle class trillions."

From his website:

Delighted to have been invited as a special guest at #Wharton Alumni #Shanghai’s Annual Dinner this past weekend! They graciously setup an author’s book signing table and I had a blast as auctioneer for the evening’s live auction. We will be scheduling a joint Wharton / Columbia keynote book event in late January. By the way, they are opening a Wharton Penn Center in Beijng around January 2015. Best wishes to Wharton Club of Shanghai!

And from an email:

In terms of their reactions, what stood out was that as a group they expressed their particular interest in the book being the first on China to dig deeper into the shadow economy of China’s middle class trillions, an aspect to China’s numbers which they realize is quite elusive by nature.

Mario Cavolo at his signing session

More at Mario Cavolo's website.

Mario Cavolo is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers' request form.  

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