Beijing Leads China’s Development Model

To think of Beijing is also to think of the outlying areas easily accessible from it. Tianjin is the nearest port to the capital city and also one of the big municipal areas to the southeast of Beijing. One can reach it within twenty-five minutes by the high-speed train, making the city well visited by Indian delegations for an exposure to the well-known skill training and vocational centre, besides the Binhai Hi-Tech Industrial Development Zone. Binhai was the first industrial zone I saw in China. The high-tech area has attracted many multinational companies (MNCs) like Toyota, Siemens, Microsoft, Samsung and so on. Due to its preferential policies for industry, Binhai Hi-Tech Industrial Development Zone has attracted 24 of the top 500 companies in the world as well as 3,600 enterprises. It was easy for me to see how the investments and manufacturing by these companies supported local economic growth —not only through the employment and revenues they generated for the local governments, but also on account of the domestic investment by local governments in supporting infrastructure and services required to attract the MNCs.

The Port City of Tianjin
When I first visited the port city of Tianjin, I was struck by the high level of urban growth, well-established high-rise buildings, parks and bridges. I wondered where the funding came from. I did find the answer, though much later, in a bestselling book that I read on China Development Bank (CDB), written by two Bloomberg journalists. It detailed how the world- famous development bank, CDB, had worked out a unique system to fund urbanization at a time when the municipal governments were finding themselves cash-strapped. For instance, the CDB gave a loan to Tianjin way back in 2003 for funding urban construction. The expectation was that the price of urban land and housing would appreciate, as the stock of urban infrastructure would increase. Leveraging on the future value of land, CDB extended large loans to the city government, securing their lending in the process. Under this model, municipalities promised to repay loans to the CDB through fiscal revenues earned over ten years, in case they could not repay on time through expected land sales at the appreciated post-development rates. This gave me an exciting insight into the practical and innovative thinking that had gone behind capital-creation in urban areas of China.

The world’s largest wind-solar project
Another landscape close to Beijing is the grasslands in the Hebei province. In fact, both Beijing and Tianjin municipal areas were carved out of the bigger Hebei Province that today surrounds the city. One day over lunch in an Indian restaurant in Beijing in March 2014 with an expert on Chinese history and culture, I learnt how the Hebei Province affects Beijing on a daily basis. Discussing the source of the city’s pollution, which had been rather bad the previous week, I learnt how not just the wind, but also its direction affects pollution. Beijing required winds to blow from the northwest to be pollution free, he stated. It is because the winds usually blew from the southeast, over the industrial area of Hebei, that the city is engulfed by a miasma of pollutants that further settle down in the bowl shaped terrain. ‘Poor planning!’ he exclaimed, explaining that the city could have been better planned from the pollution point of view at the pre-Olympics time when industries were being relocated out of the city.

However, it is the same Hebei Province where, accompanying a delegation from the Planning Commission of India, I had the occasion to see a unique model of green energy—in the form of the world’s largest wind-solar project located in the northwestern part of the province, in Zhangbei County, Zhangjiakou City. Access to the project is through grasslands that are dominated by the gracefully moving blades of giant windmills widely installed on the farmlands on both sides of the road. The sky was overcast with rolling, dark grey clouds on the day of our visit, and the grasslands looked almost white as they glistened against the sky, tall grass swaying to the winds. Villagers went about their everyday lives, riding on mopeds and scooters, oblivious to the presence of the windmills, the gentle giants in the vicinity. In one case, the huge windmill was right amidst a cluster of red brick houses!

Reaching the project site, we saw a sprawling congregation of dark solar panels installed on the ground in front of the administrative complex. ‘What were solar panels doing on a wind farm?’ I wondered. After all, this project site was supposed to be garnering power units generated by the windmills on the thousands of acres of farmlands in the vicinity! I was confused, to say the least. The question was answered soon enough, though. I learnt that the project aimed at integrating wind power with solar energy in a complementary fashion. In fact, the project generated 140 megawatts of renewable energy (both wind and solar) for the State Grid Corporation. The aim was to provide stable electric output to the grid. When wind energy is low, solar power makes up for power output, and vice versa. A smart grid transmission system is used for this process of integration of power sources. Besides, the project combined the additional aspect of energy storage with a battery station, allowing for the transfer of a vast amount of renewable energy to the state grid in a stable manner. I was struck by the three elements combined in this project, namely: (i) generation of renewable energy, (ii) a battery storage system for stability of power transmission, and (iii) a smart power transmission that made it possible for both wind and solar energy to be used in a complementary fashion. It was indeed a very impressive model in new energy technologies.

A Visit to Yingli Solar Company
A drive from Beijing in a southwesterly direction took one to the most impressive solar-power products manufacturing facility, called Yingli Solar Unit. Situated in Baoding, one of the larger, prefecture level cities in the Hebei Province, the range of its solar-powered products is astounding. I had heard of the manufacturing plant enough to want to visit it for some time. And the day I stepped into the plant premises with an Indian delegation of legislators from Kerala state, I felt like I had conquered a small peak. My expectations were not belied as we went into the exhibition area of the manufacturing unit.

The first unusual innovation I saw was of glass-topped office tables with wafer-thin solar cells embedded into the glass. The cells could absorb solar energy and generate power for a personal computer installed on the table. The next unforgettable intervention that caught my attention was that of the wafer-thin solar cells embedded within the glass facade of the exhibition building. These generated enough power to light up the entire building. Other creative demonstrations included solar panels in modular glass benches. The benches could be placed in public parks, generating enough energy to charge mobile phones through electric sockets. The scope for the use of clean and renewable energy was massive and impressive, indeed. With Beijing’s professed aim of taking measures to reduce its dependence on coal based energy, and promotion of new energy as one of the new drivers of growth, the future for companies like Yingli Solar seemed bright.

Later in June 2013, one read reports of accusations from members of the European Union regarding dumping of solar products by Chinese solar companies, allegedly powered as they were by a preferential loaning system from the Chinese state-owned banks, with EU planning to impose punitive duties on solar panel imports from China. China retaliated with similar accusations of dumping against French, Spanish and Italian wines, launching an anti-dumping inquiry into European sales of wines in China. Europe being China’s most important trading partner, and China being second biggest market for Europe after the USA, the sparring match got on to the negotiating table for trade talks between the two regions. On another note, meanwhile, it was clear that solar companies in China were running into surplus capacities and did need to look for new markets for their wares.

Interestingly, Yingli Solar was also a company touched meaningfully by the magic wand of the CDB loans that supported economic growth. At a time when the company was losing money and reporting losses (2011 and the first quarter of 2012), with a debt of more than USD 2 billion, Yingli Solar received backing from the CDB, enabling it to expand its facilities. The volume of the CDB lines of credit that were made available to Yingli Solar reportedly gave an advantage to China’s new energy company over its global competitors through enabling an increase in the scale of production and helping deliver more cost effective goods.

China’s Silicon Valley: Hope for Innovative National Champion
In Beijing, I happened to visit the country’s ‘Silicon Valley’ in one of China’s oldest and most well-known technology hubs, Zhongguancun. Situated in the northwestern part of the city, the area has developed in the vicinity of two of China’s top universities, namely Peking and Tsinghua – both featuring among the world’s top 100 universities. Much of the talent of start-up IT companies in Zhongguancun is said to have come from these two universities, with the cafes buzzing with bright, young university students meeting potential investors for start-up enterprises.

Zhongguancun is home to more than 20,000 IT start-up companies, and the technology zone houses famous IT giants like Google, Motorola, Sony, Erickson, Intel, the local brand Lenovo, besides several research centres. Biotechnology firms and electronics companies are located here, as well. With office space becoming expensive, the government helps start-ups locate themselves in much cheaper apartments. Visiting the headquarters of country’s most popular search engine, Baidu, the Chinese equivalent of ‘Google’, I was struck by the friendly, comfortable environment created by China’s leading web-based company for its employees in a modern building, with contemporary furnishings and natural light filtering in from all sides. Together with Alibaba and Tencent, Baidu completes the picture of successful, homegrown IT giants of China. As service providers like Google were slow on the Chinese internet on most days due to vexatious reasons most of us were familiar with, many of us took to using Baidu on particularly slow days.

A report by McKinsey & Co in March 2013 speaks of the rapid growth of e-tailing in China, with most transactions taking place in digitally created marketplaces rather than directly between consumers and retailers in brick and mortar buildings. The report says that 90 percent of online retailing occurs in virtual marketplaces that are sprawling e-commerce platforms, where retailers, manufacturers and individuals come together to offer services to consumers online. Analogous to American internet based retail companies like Amazon and ebay are Chinese internet retail sites like Taobao, Tmall and JD.com. These retail sites are run by bigger Chinese companies, such as web-based e-commerce giant Alibaba (Taobao, Tmall), and investment holding company Tencent Holdings Limited (stake in JD.com). With annual revenues touching hundreds of billions of dollars, China’s online shopping malls are powering economic growth and consumption. One consequence of this phenomenon is also that the entrepreneurs of Chinese e-commerce companies sit atop voluminous information on the Chinese consumer, an advantage foreign IT giants find difficult to overcome as they struggle to get a foothold in the rapidly growing world of online sales in the country. By 2014 these e-commerce companies had already brought in the phenomenon of online banking, successfully pioneered in China by Alibaba, with competitor Tencent following the model that offered investors higher returns on deposits than the biggest commercial banks of the country! An article in International New York Times described how timely investments by foreign firms in the Chinese start-ups – now titans (Tencent, Alibaba) – had reaped billions of dollars worth dividends for them. The article explained how in the 1990s these internet start- ups were struggling for capital and with ‘few Chinese venture capital firms, many Chinese start-ups turned to foreign capital.’ That these were perceived as ‘best investments of the digital age’ was borne out by Alibaba’s Initial Public Offering (IPO) in September 2014, which not only ranked as the largest US-listed IPO, but also as the World’s biggest, and led to a surge in its stocks. Media reports, for instance, spoke of American multinational, Yahoo, raking in earnings of USD 9.4 billion in September 2014, by selling 140 million shares in Chinese e-commerce giant, Alibaba, at the time of its IPO. Further, in October 2015, as markets in China recovered after the mayhem of August 2015, Alibaba shares showed a ‘better-than-expected’ result for third quarter of 2015, with a 32 percent increase in revenue and a 30 percent increase in earnings per share, on a year-over-year basis, as reported on Yahoo Finance.

A Model of Centralized Political Power, but Decentralized Economic Power
The central government at Beijing follows a decentralized model of governance. While this model has the advantage of giving reasonable levels of autonomy to the provinces for attracting foreign investment by offering the MNCs land and labour, besides concessional tax policies, it also leaves the provincial governments dependent on local means of resource generation. Land financing by selling land to real estate developers then becomes one of the major means of resource generation for the local bodies. As local governments reserve the right to convert community land in the countryside into urban areas for real estate development, it leads to creation of vested interests against bringing land reforms to the countryside. It also has the concomitant outcome of high property prices, as developers in turn seek to recover the high costs of land deals through the sales of expensive luxury apartments. Many observers point out the risk such an arrangement has in encouraging a nexus between the local leaders and real estate developers, while denying the famers property rights. Resource generation for local governments was indeed an issue in China, with income from real estate and related activities accounting for more than 50 per cent of the revenue of the local governments in 2013! Need to generate adequate resources for development projects also led the local governments to borrow from the unregulated financial institutions outside the banking sector. In June 2013, local government debts were touching USD 3 trillion, becoming an area of threat for the financial sector and the Chinese economy, as concerns over returns on these debts mounted. In a report of the World Bank and the Development Research Centre of the State Council of China, titled ‘China 2030’, one of the six areas of priority reforms for the country was to address this issue. Strengthening the local fiscal system to mobilize additional revenues for local governments to meet their developmental and social welfare programme responsibilities was listed as one of the priority reforms. The report pointed out that one of the key dimensions for strengthening the fiscal system involved ‘ensuring that budgetary resources available at different levels of the government (central, provincial, prefectural, county, township, village) are commensurate with expenditure responsibilities.’ It goes on to link fiscal reforms in the system as a precondition for other developmental reforms involved in the restructuring of the Chinese economy and to promoting sustained development and the growth of China as a nation.

(Extracted from China: Behind the Miracle by Sumita Dawra, Bloomsbury India, Rs 499, 252 pages.)

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