The future is "Shanzhai" - faking it for real

A recent article in the People's Daily Online reminded me of a recent experience in China. On numerous occasions I was offered a fake iphone.

Given the technical quality of this product it amazed me that such an item could be faked in the sense that it actually worked and how it could be done so cheaply. Whilst this shows up the profit margins that Apple must make on these products it also shows the skills that are inherent in Chinese firms. Even replication takes considerable effort.

It turns out that the market for fakes has a name - "Shanzhai". This article is interesting on many levels but does suggest that Western brands are fighting a losing battle in China.

I am still left a little confused. Take this quote from the article below:

Xiang said compared with real ones, there was still some way to go in terms of functions, quality and after-sale services, but these "Shanzhai" items were still worth buying.

"They were usable and cheap. They look exactly like real ones and make me cool. That's enough for me," Xiang said.

Now I understand the "coolness" bit but this suggests that a fake iphone will look like an iphone but not work like an iphone. However, at least some elements must work even if it is just the phone bit. It is not hard to see why demand would be so high it such a status driven country that is just discovering the joys of capitalism and conspicuous consumption.

The Hiphone maker is also refreshingly honest stating that he accepts that Apple might sue him. I expect by then the profits will have been safely stashed away and the company will disappear - IF Apple are ever able to find him. The costs are small and the gains are huge.

It looks like the word "Shanzhai" has gone mainstream.

More importantly, China is only going though the stage of development that was followed by Japan in the 1980s. Japan imitated and then realised it that it could do better than the West. China is merely following this well trodden path to development. The West innovates and provides the creative spark, the East copies, improves and takes the products mainstream at a cheaper price.

The only solution for the West is to keep running to stand still and maintain high levels of R&D spending as China is catching up very fast.

China Exclusive: Faking it for money or fun? [People's Daily Online]

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Products imitating famous brands have not been uncommon around China for a couple of years - and now they have a unified name, a brand if you like, "Shanzhai".

The Chinese word "Shanzhai", literally meaning small mountain village in the dialect of southeast China's Guangdong Province. It became a popular name for fakes when "Shanzhai Cellphones", churned out by small-scale manufacturers in southern China, quickly seized a considerable chunk of the mainland market over the past two years.

Now "Shanzhai" has been given with a broader meaning of fake, unprofessional or homemade, a slang for anything that steals ideas or styles from already well-known stuff.

Imitated electronics, including cellphones, MP3s and even laptops, are the most common "Shanzhai" products. Despite the possible infringement of intellectual property rights, they are much liked by young people and those on lower incomes.

Xiang Lianfei, 25, a salesman in Shanghai, bought a fake Nokia N95, a fake iPod Nano and a fake Rado watch costing a modest 2,000 yuan, while the three genuine items would have cost him more than eight times that amount.

Xiang said compared with real ones, there was still some way to go in terms of functions, quality and after-sale services, but these "Shanzhai" items were still worth buying.

"They were usable and cheap. They look exactly like real ones and make me cool. That's enough for me," Xiang said.

And Apple Inc. might be shocked by the hot-sale copycat HiPhone, on the market while its genuine product iPhone has yet to go on sale on the mainland. Qixingjian, a HiPhone dealer running an online shop on Taobao.com, sold out 280 items within one month.

The company which manufactured HiPhone, with its brand slogan of "not iPhone, better than iPhone", had its own registered trade mark and a complete operating system.

"We know Apple may sue us, but it's driven by huge market demand. Our company needs to copy from famous brands to survive first, and we will improve our R&D and seek further development in the future," said Zhang Haizhen, vice-president of the company. Zhang chose to be identified by his own name without mentioning the name of his company.

The HiPhone company sold out about 5,000 HiPhones in the past three months, and according to Zhang, at least one million other fake iPhones had been put on sale in the mainland market, some of which were even rip-offs of HiPhones!

Zhang claimed his company was developing the technology of integrating two mobile network operators onto one cellphone.

"Imitation is the first stage for all mobile companies," he insisted, "but in the long run, it's only dog-eat-dog, that's why we are working on our home-made independent brand," he said.

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Still, the word's popularity is overwhelming. Not only is the word used in commercial TV programs and dramas and about ordinary people whose appearance looks like certain celebrities, but also many grassroots parodies made by ordinary people have been nicknamed "Shanzhai."

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But still some disagreed. Zhou Xinning, an Internet commentator, said "Shanzhai" products had had a great impact on some industries and the government should pay special attention to the new phenomenon.

"We have 'Shanzhai' things everywhere, especially on the Internet. A flood of 'Shanzhai' was like junk. Policy guidance is in need," Zhou said.

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"'Shanzhai' companies should always keep in mind that independent innovation is crucial for long-term development. 'Shanzhai' creation by common people is the new form of our mainstream's sub-culture," Xia said.

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China saves, the US spends, the economy crashes

It is a sign of China's growing confidence that its officials are able to blame US over consumption for the worlds ills.

The Chinese capacity for saving is well known. So how can we get the Chinese to spend more of their hard earned money?

The other topic that this blog tends to gravitate towards is the artificially low exchange rate that commentators suggest is kept low to encourage trade and hence jobs.

However, the two points above are in conflict. In today's FT the editorial suggests that to solve the under spending problem the currency should be allowed to appreciate. I happen to believe that this would not be enough. China should spend money on welfare schemes if they expect the average citizen to stop saving for a rainy day.

Whilst this might have worked for a while and the currency was allowed to slowly appreciate China has recently reversed this trend.

As we have mentioned before, this is to protect jobs and jobs are what matters.

The world should not bank on a currency appreciation any time soon. However unfair it might appear for China (with such a large surplus) to keep a currency rate too low the West had better get used to it and plan for it.

Chinese acrobats [FT]

It would have taken a heart of stone not to smile at the spectacle of Hank Paulson, US Treasury secretary, receiving a lecture on economic stabilisation from Chinese officials. Zhou Xioachuan, governor of the Chinese central bank, blamed US over-consumption for the crisis, while Wang Qishan, the leader of the Chinese delegation, urged Mr Paulson to guarantee the safety of Chinese investments in the US. At a separate event in Hong Kong, the chairman of China’s sovereign wealth fund pointed out that many developing countries had clearer and more consistent economy policies than Mr Paulson did. Ouch.

Yet just because Mr Paulson has stumbled badly in recent months does not mean that China is on the right track. Zhou Xioachuan is wrong to urge a higher savings rate in the US. The US consumer is in full retreat; were the retreat to become a rout, China’s factories would be among the first to be ruined. To commandeer Saint Augustine’s prayer: “Give us global rebalancing – but not yet.”

If the US has overconsumed, China suffers from the opposite malaise. The savings rate is close to 60 per cent of gross domestic product, and Chinese policy has centred on producing cheap products to sell to the US on credit. This cannot continue forever. China’s citizens deserve to enjoy more of the fruits of their labour, which means spending more and saving less. China’s concrete-pouring fiscal stimulus is unlikely to help. It should be handing cash to its own citizens and spending more on health, education and social security. China’s citizens save because they fear nobody will look after them in bad times – and bad times are coming.

A quick way to encourage domestic spending would be for China to allow the renminbi to appreciate. Until this summer, China had been doing that carefully. The appreciation has now stopped and last week the renminbi experienced its largest one-day fall against the dollar. Nobody should be surprised: China warned in October that this change in policy was on the cards. But it cannot be right for a country with such a huge surplus to resort to competitive devaluation. China’s main defence, for now, is that the renminbi is still appreciating against a trade-weighted basket of currencies. But if the dollar falls, the renminbi must not try to overtake it on the way down.

China must walk a tightrope. Too sharp an export slowdown risks domestic unrest, and neither can it allow a dollar collapse. Let us hope that China’s leaders are acrobatic. The world cannot afford a trade war with Chinese characteristics.

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China devalues - inevitable Chinese politics

There should be no surprise that the natural response from China to falling exports and rapidly increasing unemployment it to revert to type. What is China's type? It is to devalue and manipulate the currency so as to promote exports and thus generate jobs.

This is fine. But what are the costs?

Perhaps the key to this answer is the fear of deflation. The economics of deflation are complex but suffice to say - deflation is to be avoided at all costs. This policy move from China is pushing us in this direction.

Pettis is also a respected commentator and should be listened to.

The respected right-wing paper the Daily Telegraph reports:

1930s beggar-thy-neighbour fears as China devalues [Daily Telegraph]

The central bank has shifted the central peg of its dollar band twice this week in a calculated move that suggests Beijing aims to offset the precipitous slide in Chinese manufacturing by trying to gain further export share abroad.

The futures markets are pricing in a 6pc devaluation over the next year. "This is clearly a big shift in policy and we are now on alert," said Simon Derrick, currency chief at the Bank of New York Mellon.

The move follows a Politburo speech by President Hu Jintao warning that China is "losing competitive edge in the world market".

China has allowed a crawling 20pc revaluation over the past three years. Any reversal risks setting off conflict with the incoming team of President-Elect Barack Obama in Washington. Mr Obama called China a "currency manipulator" during the campaign, a term that carries penalties under US trade law.

Outgoing US Treasury Secretary Hank Paulson is viewed as a "friend of China". He called for a stronger yuan this week before embarking on a visit to Beijing, but the plea was couched in friendly terms. This soft-peddling may soon change.

Hans Redeker, currency head at BNP Paribas, said China's policy switch could set off a dangerous chain of events. "If they play this beggar-thy-neighbour game, it will cause a deflationary shock for the whole world," he said.

It makes sense for countries with current account deficits such as the UK, US or Turkey to let their currencies fall, but China has the world's biggest trade surplus.

Michael Pettis, a professor at Beijing University, said it was "very worrying" that a pro-devalulation bloc seemed to be gaining the upper hand in the Communist Party. "I really do believe that we are on the brink of a very ugly period for trade relations," he said.

China has relied on exports to North America and Europe as its growth engine, making it acutely vulnerable to the contraction in global demand. Mr Pettis said this recalls the role played by the US in the 1920s, a parallel fraught with danger. "In the 1930s the US foolishly tried to dump capacity abroad, but the furious reaction of trading partners caused the strategy to misfire. China already seems to be in the process of engineering its own Smoot-Hawley," he said, referring to the infamous US Tariff Act in 1930.

China showed restraint during the Asian crisis in 1998, holding the line against domino devaluations across the region. It may yet hold the line this time.

However, this crisis is more serious. The manufacturing sector has seen the steepest decline since the records began, with devastation sweeping the textile, furniture and toy sectors. Civil unrest has begun to rock the Guangdong and Longnan regions.

Beijing has slashed rates and unveiled a fiscal stimulus of 14pc of GDP, but most of the spending comes in the form of instructions to local governments to spend more – but without giving them the money. Does China really intend to step in to prop up global demand? The jury is out.

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China Blog Awards

Chinalyst are again running their China blog of the year award.



Click here to vote.

VOTE

I have no chance of winning (sob, sob) but it is nice to be nominated. A top half finish would be nice though.

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US warns China NOT to roll back currency

The appreciation of the RMB against the dollar has been welcomed in recent months by both parties. US goods become more competitive and China was able to apply the brakes.

That was before the global recession. Now the US wants even greater appreciation but as I have noted in this blog on numerous occasions, China cares about jobs more than any other economic issue.

To protect jobs means a depreciation of the currency. This would not go down well in the US as Paulson recently warned. The FT reports:

Paulson urges China not to curb currency [FT]

The US urged China on Friday not to “roll back” the appreciation of its currency that has taken place over the last two years to prevent an even sharper economic slowdown.

Hank Paulson, Treasury secretary, said that the main reason for job losses among Chinese exporters was slowing global demand, not currency appreciation.

“Some people in China, looking at the slowing global economy and seeing what is happening to exports, might blame it on currency appreciation and seek to roll that back,” he said in Beijing. “China understands, as do we, how important currency reform is to rebalancing growth in China.

Mr Paulson was speaking at the end of the two-day strategic economic dialogue, a bi-annual meeting of US and Chinese ministers and officials. The meeting has been accompanied, after a relatively large drop in the renminbi earlier this week, by considerable speculation the Chinese central bank is weakening the currency against the dollar to help exporters.

The two governments warned against the danger of increased protectionism and pledged to boost co-operation to deal with the global financial crisis, promising to make $20bn of trade finance credit available to developing countries struggling to pay for US and Chinese exports.

Mr Paulson said the fiscal stimulus package announced by the Chinese government was “very welcome”. “The Chinese leadership is very focused on what is happening here and will do whatever it takes to maintain growth,” he said.

Chinese officials restated concerns about their heavy exposure to US public debt. Asked about China’s plans for future purchases of US Treasury bonds, Zhu Guangyao, China’s assistant finance minister, said: “We hope the US side will seriously consider China’s concerns and protect the interests of Chinese investors.”

Mr Paulson played down the risks of foreign governments selling out their holdings. ”It is a fact that China is an investor in US securities,” he said. “I do not see any countries with holdings so large that I view it as a threat.”

Both sides said it was important to continue the dialogues, which started in 2006, after the Obama administration is sworn in. “Ideas that work generally do not die,” said Mr Paulson, who before the financial crisis took hold had made relations with China one of his priorities.

Mr Zhu said President-elect Barack Obama had spoken on the phone with Chinese President Hu Jintao and emphasised his willingness to ”further strengthen constructive relations between China and the United States”.

The renminbi appreciated modestly on Friday as speculation about a shift in currency policy receded. Chen Deming, China’s commerce minister, said the recent weakening of the currency against the dollar was not aimed at helping exporters.

Economists said China was highly unlikely to push for a significant depreciation of its currency because of the trade tensions this would invite. However, if the dollar were to continue strengthening, China might slowly weaken the renminbi against the US currency to avoid excessive appreciation against the currencies of other main trading partners.

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"Mass Unrest" goes mainstream

Better late than never, the BBC has also finally realised that all is not rosy in China.

The question now is whether the increase in column inches will have a self-fulfilling prophesy effect. Given the media control in China this is less of a danger.

For this commentator to talk about "extremely likely" the danger appears to be closer than even I believe.

China 'faces mass social unrest' [BBC]

Rising unemployment and the economic slowdown could cause massive social turmoil in China, a leading scholar in the Communist Party has said.

"The redistribution of wealth through theft and robbery could dramatically increase and menaces to social stability will grow," Zhou Tianyong, a researcher at the Central Party School in Beijing, wrote in the China Economic Times.

"This is extremely likely to create a reactive situation of mass-scale social turmoil," he wrote.

His views do not reflect leadership policy but highlight worries in elite circles about the impact of the economic slowdown.

Mr Zhou warned that the real rate of urban joblessness reached 12% this year and could reach 14% next year as the economy slows.

China's annual GDP growth has already slowed to 9% in the third quarter, from 10.1% in the second. Some forecasters see growth slowing to 7.5% next year.

The government has launched a stimulus package and cut interest rates to boost the economy.

Unrest warning

Last month, China's top planner warned that the economic slowdown in China could fuel social unrest.

Zhang Ping, head of the National Development and Reform Commission, said the impact of the global crisis on China's economy was deepening.

"Excessive bankruptcies and production cuts will lead to massive unemployment and stir social unrest," he said.

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China not brave enough to save the world

China may be very good at making things cheaply but they are terrible investors. The losses China has made on US paper and its recent forays into buying stakes in large US companies and private equity holdings has left China nursing severely burnt fingers.

China is now pulling back from such deals in a world of financial uncertainty. The West cannot rely on China mobilising its vast surpluses to save Western companies.

Ironically this could be another example of China being a bad investor. They have already bought high and now show no appetite for buying low. The classic investor mistake. I expect China will start buying again only after prices have gone back up. The most basic mistake investors make.

CIC ‘not brave enough’ for foreign buys [FT]

HONG KONG, Dec 3 – China Investment Corp, the sovereign wealth fund that has incurred steep paper losses on its stakes in US financial firms, said on Wednesday it is ”not brave enough” to invest in foreign financial firms and lacks confidence in the shifting US financial regulatory situation.

”It’s changing every week. How can I be confident?,” Lou Jiwei, chairman of CIC, said during the Clinton Global Initiative event in Hong Kong, referring to US government efforts to rescue the devastated financial services sector.

He said the fund continued to make investments overseas, and was looking to diversify geographically to include emerging economies.

”We are still actively making investments outside, and we will continue our investments,” he said during a panel discussion.

Lou made his remarks just ahead of talks scheduled in Beijing between US Treasury Secretary Henry Paulson and Chinese officials in the fifth round of a so-called ”strategic economic dialogue” that Paulson initiated in 2006.

Lou said the world should not look to China to resolve the financial crisis.

”I think China as an independent country is not likely to lead the rest of the world,” he said.

While ailing financial firms in the United States and Europe have sought capital injections from cash-rich sovereign wealth funds, China Investment Corp has grown shy when it comes to investing in overseas financial companies.

”We don’t have the courage to invest in financial institutions any more, because we don’t know what problems we will put ourselves into,” he said.

CIC has incurred large unrealised losses on its stakes in US private equity firm Blackstone Group and Wall Street bank Morgan Stanley.

CIC bought its initial $3 billion stake in Blackstone just before the company went public at $31 a share in June 2007, and earlier this year increased that holding. The stock closed on Tuesday at $5.34.

Late last year it paid $5 billion for nearly 10 percent of Morgan Stanley. Shares in the Wall Street firm have tumbled from about $50 at the time of the deal to $12.04 on Tuesday.

CIC has also invested in the share listings of Visa and China Railway Group.

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