CER Dec. 2015

Does bigger = better?

DECEMBER 2015 VOL. 26, NO. 4 | www.chinaeconomicreview.com 201512

Dragons in Diamond Village

Seeing past the smog

Editor-at-large Graham Earnshaw

Co-Publisher Alex Wong Shiu Chung

ExecutiveEditor Graham Earnshaw

DeputyExecutiveEditor Gao Fei

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This issue of China Economic Review takes an in-depth look at the issue of Big Data, a process of collecting information and using the results for commercial purposes which is chang-

ing retail markets at lightning speed. The major Chinese online

players, including Alibaba and Baidu are involved, and the sig-

nificance and depth of impact of this new approach to human

activity number crunching is only slowly becoming clear. All

that is certain at this point is that the impact will be greater than

we think. Also in this issue, a fascinating interview with David

Bandurski, a former colleague of ours, on the crucial topic of resi-

dency registration and how China is likely to deal with the results

of three decades of coastal cities relying on migrant workers to

build their economies.

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The House View

8 Amixedbag

News Highlights

14 Newsbriefs

Cover Story

20 Doesbigger=better?

Interview

32 TheEraofBigData

Culture Map

36 HistoricalPerspectiveon

ChinasPropertyMarket

58 JiuzhouNewWorld

62 DisneysLegendaryKingdom

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CONTENT

CoverstoryDoesbigger=better?20Chinasbigdatadreamsmaybeinforarudeawakening

China Economic Review | December 201504

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Look at China

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THE HOUSE VIEW

Asset-backed securities hold promise and peril for Chinas capital market

Ann Rutledge was in Hong

Kong when Mao died, got in

on the ground floor of eco-

nomic reforms and helped set up the

Hong Kong futures exchange before

going into asset-backed securities

(ABS)the same financial tools widely

blamed for the global financial crisis in

2008. So you might expect her to have

long since ceased being surprised by

Chinas financial markets.

Not so.

When she applied for a grant with

the SWIFT Institute to study Chinas

asset-backed securities market, Rutledge

said, I assumed the Chinese market

would look similar to the US market,

but with Chinese-flavored assets but I

figured wrong.

What she found was a burgeon-

ing sector beset by legal vagaries and

bisected by dueling regulators and asset

classes, one that could potentially do for

China what it did for the United States:

Supply companies with far greater

liquidity while providing investors with

an asset class that can be tailored to suit

their risk profile, all (ideally) without

culminating in a crisis like the one in

America that rocked markets the world

over.

While still relatively small, in recent

years the securitization market in China

has grown as rapidly as government

quotas will allow. If given more room

for healthy growth, ABS could help pull

a substantial sum out of Chinas noto-

rious shadow banking sector where

wealth management products often

act like ABS, but lack any semblance of

transparency. Kingsley Ong, a partner

at the law firm Eversheds International

who helped draft Chinas asset-backed

security laws, said that based on rising

demand for better investment opportu-

nities, the potential for securitization in

China was practically unlimited.

But as Rutledge and other observers

have also pointed out, a lack of data on

the nuts and bolts of the great majority

of deals in this emerging market, togeth-

er with widespread inexperience among

investors who rely on caution instead of

expertise, raise questions about its influ-

ence on the economy at large.

I dont want to sound like an

alarmistIm not. Im a proponent of

[ABS], Rutledge said. But when

people want to see a market grow theyll

say anything, and theyll turn a blind

eye to things that are obviously prob-

lematic.

Stop-start progressChinas securitization market began in

April of 2005, when the central bank

and banking regulator established a

pilot market and regulations. Those

were suspended in 2009, by which

time the role of American mortgage-

backed securities in kick-starting what

had become a global financial crisis had

A mixed bag


THE HOUSE VIEW

become common knowledgea move

even more critical voices on Chinas

economy say made sense.

While I am sometimes a critic, I will

say I can understand China saying hey,

we better figure out this product and

this market before we allow it to go full

bore in ours, said Christopher Bald-

ing, professor of economics at Peking

University.

Once the dust had settled from

Americas financial implosion, Beijing

looked once more to securitization as a

promising financing tool, and in May

of 2012 revived the marketthough

it forbade the structures (re-securiti-

zations and synthetics) that caused the

crisis in the US.

Eddie Hu, a partner at the Shang-

hai office of consultancy King & Wood

Mallesons who has advised banks, auto

finance companies and financial firms

on asset-backed securitizations, chalked

a recent increase in issuance up to an

easing of regulations. Before 2015, firms

had to get case-by-case approval from

the authorities; now they can sell freely

once theyve registered regulators.

The administrative process has

been simplified, incentivizing those who

originate and issue to do more securiti-

zation, Hu said.

Since the ban was lifted, issuance of

asset-backed securities (ABS) in China

has grown by leaps and bounds: In 2014

China overtook South Korea to become

the largest securitization market in

Asia, and this year issuance had topped

RMB235 billion (US$36.88 billion) by

late October, up 18.5% for the year to

date, according to Bloomberg data.

Its grown very rapidly, Balding

said, however in comparison to things

like bank lending or even the general

bond market its simply tiny.

Structural complexityBalding attributed that relatively minus-

cule market size to two main factors:

A preference among Chinese investors

for less complex financial products and,

perhaps most vitally, a lack of under-

standing of what exactly they are.

In this many Chinese investors are

not alone, as the apparent complexity of

ABS is among the many attributes that

help make the sector seem impenetrable

to outsiders.

An asset-backed security essentially

takes contractual future cash flows or

expected stable operating cash flows

and converts them into immediately

fungible funds by borrowing against

those flows and the assets that generate

them. For example, as has been done

with certain expressways in China, the

company that owns a toll road can use

that road as collateral in order to get

financing from investors now based

on the income it has yet to make from

tolls paid by drivers who will use said

road.

To actually come up with the

money, the company can set up an

issuing financing vehicle that offers

interest-bearing securities to investors

based on those expected cash flows

from future toll payments. Once inves-

tor financing is secured, the vehicle

will actually buy the toll road from the

companyso the company gets money

now, and the financial instrument

begins directing money from toll pay-

ments directly to the investors holding

the securities until the promised pay-

outs are paid off in full.

If the cash flows from the toll road

dry up, the investors can take the road

and sell it off as compensation. And

because the company doesnt actually

own the road anymore, it cant stop the

issuer from transferring ownership to

those investors.

A financial institution typically helps

set up the issuer known as a special

purpose vehicle (SPV) that issues

securities to investors, often in different

batches that are classified based on their

level of risk, which is tied to priority of

repayment. The risk level of each batch is

certified by one or more ratings agencies.

The credit rating for such securities

can be higher than that of the company

from which they originated because the

risk being evaluated is that of the cash

flows themselves. So your company

might not be triple-A, but you can still

issue bonds that are triple-A, Ever-

shares Ong said. That is a phenom-

enal advantage. Thus, securitization

can enable a company to raise funds

more easily than might be otherwise

possible through a loan based on its bal-

ance sheet. It also creates a new class


of investment with risk portioned

out to suit the tastes of investors, which

can range from more cautious pension

funds to less risk-averse private hedge

funds.

But Beijing has added another wrin-

kle to the proceedings by separating

ABS into two categories, administered

by two different regulators.

Market landscapeBeijing has added another wrinkle to

the proceedings by separating ABS into

two categories administered by two dif-

ferent regulators.

The first, most-favored variety falls

under the Credit Assets Securitization

Scheme (CASS) and trades on Chinas

interbank market. Here, assets origi-

nate with banks, trust companies, lend-

ers and auto finance firms, securities for

which are issued by trust companies on

their behalf to be snapped up by institu-

tional investors.

CASS is also the bigger and more

liquid market: As of June 25, 12% of

all 2016 Chinese securitizations to date

were CASS, accounting for 82.2% of the

total principal issuance of RMB605 bil-

lion, according to Rutledges findings,

published in a working paper published

in September by the SWIFT institute.

Of the 127 CASS deals analyzed in

the working paper, nearly three quar-

ters were collateralized loan obligations

(CLOs)securities backed by a pool of

debt, typically sourced from small- and

medium-sized enterprises. The next-

largest cohort, auto loans, stood at just

over 10%.

Yet while similar CLO offerings are

priced lower than general-purpose cor-

porate bonds in US and UK markets, in

China they arent.

What that seems to indicate is that

either the companies arent selling the

[securitized] bonds properly or the

investors dont believe what the compa-

nies are saying, they dont believe that

the securitized bond is giving them any-

thing more tangible in return, Balding

said.

Investing in the darkThe reason behind such puzzling valu-

ation of the interbank markets most

popular ABS offering may lie in a short-

age of two key assets: Information and

experience.

Rutledge, also an adjunct assistant

professor at the Hong Kong Univer-

sity of Science & Technology and the

founder of securitized asset assessor

R&R Consulting, said that her firm only

dealt with deals for which perform-

ance data was available, narrowing the

options considerably.

The only deals that I can get what

we call servicer data - what we call

underlying performance data - on are

coming out of deals that foreign manu-

facturers are doing, specifically the auto

manufacturers, she said.

That attraction stems largely from

the fact that reporting for auto loan

ABS issued by foreign firms is stand-

ardized, and includes information on

the assets generating the cash flows

in addition to sectoral exposure and .

Disclosures from automakers like Nis-

san, BMW and Volkswagen allow ABS

investors to determine how many loans

are delinquent, how many have default-

ed, the likelihood of being repaid in full

on time.

Indeed, Hu said the performance

record of auto loans underlying asset

pools was quite good compared with

other corporate loans because theyre

very diversified, making for a perform-

ance record that will be attractive to

international investors.

For the roughly 90% of the CASS

market that isnt backed by auto loans,

this vital performance data isnt made

public, although it is collected by the

China Central Depository & Clearing,

the official clearing company for the

interbank market.

Trust issuesOutside of Chinas interbank market,

ABS growth is being held back by the

uncertain legal status of the legal frame-

work currently available for use by non-

financial institutions in securitizing

assets.

The question comes down to the

kind of special-purpose vehicle that is

created to issue securities to investors

on behalf of a company and which takes

on ownership of its assets. In short,

while the tool used by financial institu-

tions (a special-purpose trust) is well-

established in PRC law, the only one

available to non-financial firms isnt.

Under the current setup, known as

the Asset Backed Specific Plan (ABSP)

model, these companies have to use

contracts to transfer ownership of

assets. The resulting ABS cannot be

traded on the interbank market, but can

be offered to retail investors and even

listed on the Shanghai and Shenzhen

stock exchanges. But the grounds on

which those underlying contracts are

permitted only amount to administra-

tive rules, which can be overruled by a

host of higher regulations.

As laid out in a recent study of Chi-

nas securitization law published in the

Capital Markets Law Journal and co-

authored by Ong, such rules may have

different levels of enforcement in differ-

ent parts of China, and may be subject

THE HOUSE VIEW


to policy changes over time, or even

competing political interests.

That means the rights of investors

who hold ABS arent guaranteed pay-

ment, which forestalls development of

securitizations by non-financial insti-

tutions any time soon. As the studys

authors write, [the] securitization

industry may need to remain patient.

This helps explain why as of late

June, when data for the SWIFT working

paper was gathered, principal issuance

in the ABSP market had grown only 3.4

times that seen prior to the 2008 market

hiatus, while average deal size had fallen

to RMB3.87 billion (US$607.7 million),

only 56% of its pre-freeze level.

Meanwhile, ABS trading on Chi-

nas interbank market has expanded

to gigantic proportions by compari-

son: As of June 25, principal issuance of

CASS had grown to RMB497.6 billion

(US$78.09 billion), eight times what

it was in 2008, while average deal size

grew just over 1% to RMB3.29 billion.

Untapped potentialEddie Hu at King & Wood Mallesons

said that the clearer picture for investors

of underlying assets and risk pointed

to brighter prospects going forward of

ABS issued by financial institutions.

But even here he was conservative, cit-

ing recent cuts by the central bank to

Chinas benchmark lending rate as eas-

ing any pressure mainland banks were

under to find more funding.

I dont think there will be a leaping

increase in issuance numbers or size,

but I think the number of issuances and

issuance size will increase gradually in

the coming years, Hu said, pointing in

particular to local commercial banks at

the city level and below as likely to try

their hand at ABS.

That is looking more likely in light

of recent regulatory easing: In June,

Reuters reported that the China Bank-

ing Regulatory Commission had grant-

ed provincial branches permission to

green-light new issuance for cities com-

mercial banks for their ABS plans

though big banks apparently still need-

ed issuance approval from the commis-

sions headquarters in Beijing.

Yet even those approved by the

banking regulator remain opaque by

the basest standards of international

ABS investing, Rutledge said, adding

that knowledge of the routines used by

securitization analysts to rate the batch-

es issued in securitizations was sketchy

as well.

People are doing deals and the

deals seem to work, but one of the rea-

sons the deals are working is because

the high performing collateral is whats

being securitized, said Rutledge.

That leaves open the question of

whether Chinas ABS investors will be

able to tell what theyre getting them-

selves into when regulations on what

can be securitized within the interbank

market are eventually loosened once

new finding new sources of funding

becomes a priorityparticularly if per-

formance data remains as scarce as it is

now.

You cant put a fence up and expect

it to contain water. Water flows. Money

flows, Rutledge said.

THE HOUSE VIEW


2015

6.9%20096

7%

Louise Keely

330

9015

90

1.5%

50%

80%

ZestFinance

20202.560


NEWS ROUNDUP

NEWSHIGHLIGHTSIMF to add yuan to SDR reserve currency basketThe International Monetary Fund

admitted the Chinese yuan to the Spe-

cial Drawing Rights basket of reserve

currencies alongside the dollar, euro,

yen and pound, Reuters reported. The

yuan will have a 10.92% share, in line

with expectations, after a review of the

weightings formula for the SDR which

also cut the euros share by more than

six percentage points. The yuans inclu-

sion in the basket from October 2016

is a largely symbolic move with few

immediate implications for financial

markets. But it is the first time an addi-

tional currency has been added to the

SDR basket, which determines which

currencies countries can receive as part

of IMF loans.

Mainland stock exchanges tight-en restrictions on margin tradingThe Shanghai and Shenzhen stock

exchanges raised margin requirements

from 50% to 100% in a move meant to

prevent systemic risks from building up

in Chinas financial system, Bloomb-

erg reported, citing a statement from

the Shanghai bourse. The rule change

limits margin investors to borrowing

from brokerages only as much as is in

their current account, rather than dou-

ble that, as was previously the case--and

which helped intensify this summers

equities boom-turned-bust. The Shang-

hai exchange said in a microblog post

that the move would reduce leverage

and ensure healthy development of

the market.

Family planning office demands one-child enforcement until new law passedThe National Health and Family Plan-

ning Commission lashed out at a pro-

vincial office in Hunan for its plans

not to harshly penalize those who

gave birth to a second child before a

new two-child policy is enacted, South

China Morning Post reported. The

national commission stressed that the

new policy cannot be implemented

until the National Peoples Congress

Standing Committee amends the

Population and Family Planning Law.

Each province will then draft its own

implementation plan for local peoples

congresses to approve and change their

family planning laws, usually done in

the first quarter.

Beijing delays financial liberaliza-tion in the face of economic woesBeijing is delaying opening of its finan-

cial borders as the leadership shifts to

emphasize stability in response to eco-

nomic slowdown, The Wall Street Jour-

nal reported, citing a wide range of offi-

cials, executives and advisers as well as

the minutes of a September closed-door

meeting of top leaders from the Nation-

al Development and Reform Commis-

sion and the Ministry of Finance. But

even a new target of 6.5% annual eco-

nomic growth for the next five years,

announced by President Xi Jinping,

may prove hard to hit, with analysts

saying that it would require stepped-

up stimulus measures that would run

counter to long-discussed reforms that

could squeeze near-term growth.


J.P. Morgan hired family, friends of Chinese execs for nine out of 12 IPOsJ.P. Morgan Chase & Co. hired the fam-

ily and friends of executives at nine out

of 12 major Chinese companies it took

public from 2004 to 2013, The Wall

Street Journal reported, citing a docu-

ment compiled by the bank to submit

to US investigators in April as part of

a federal bribery investigation. The

document lists 222 candidates hired

by the bank under a program known

internally as Sons and Daughters,

and names the people who referred

themthe most detailed accounting

yet of the overlap between the program

and the banks business in China. list-

ings included Agricultural Bank of

China (US$22 billion), China railway

group (US$5.9 billion) and CGN Power

(US$3.6 billion)

Summer equities bailout leaves national team holding 6% of stock marketChinas national team of state finan-

cial institutions, corralled into purchas-

ing shares to stem this summers equi-

ties rout, ended up collectively owning

at least 6% of the mainland stock mar-

ket, The Financial Times reported, citing

data from Wind Financial. The figures,

compiled from quarterly financial state-

ments disclosing listed firms ten largest

shareholders, likely underestimate the

national teams actual holdings. The

government cash infusion came after

the Shanghai Composite index fell more

than 40% from its seven-year high on

June 12 till late August. Goldman Sachs

estimated in September that the gov-

ernment had spent RMB1.5 trillion

(US$234 billion) to support the market

in July and August.

MSCI adds 14 overseas-listed Chinese firms to emerging mar-ket indexMSCI has added 14 overseas-listed

Chinese firms - including Alibaba

Group and Baidu - to its influential

MSCI Emerging Market index, Reu-

ters reported, citing a statement from

the company. Analysts estimate the

rebalancing could trigger up to US$70

billion in net flows into the group

of stocks over the next half year and

bump up Chinas weight in the index

by three percentage points to 26% in

the process. Overseas-listed Chinese

firms also comprised the lions share

of 18 securities added to MSCIs China

Index. MSCI chose to exclude main-

land-listed A-shares from its global

indices in June, shortly before a dra-

matic selloff ended a months-long rally

in China stocks.

Citic Securities admits to vast-ly overstating April-Sept equity swapsMainland brokerage Citic Securities

admitted to incorrect reporting that

resulted in overstating total equi-

ty swap transactions between April

and September during the height of

Chinas stock market volatility, The

Wall Street Journal reported, citing an

emailed statement from the company.

The statement came after the Securi-

ties Association of China claimed it

had in October discovered a massive

error in regulatory filings on swaps by

Citic that overstated the figure for the

April-September period as RMB1.063

trillion (US$166.46 billion), or 26

times its actual size of around RMB40

billion. Citic cited computer system

upgrades as the reason for the incor-

rect reporting.

Bacteria-hopping gene found in China could enable worldwide antibiotic resistanceScientists in China have discovered

that a gene enabling resistance to the

sole remaining fully functioning class

of antibiotics, colistin, is widespread

in bacteria carried by both pigs and

people in southern China--and can be

transferred from one strain of bacteria

to another, The Guardian reported,

citing the journal Lancet Infectious

Diseases. China is one of the worlds

largest producers and users of colis-

tin for agricultural and veterinary use,

stoking greater resistance. Although

resistance to this important and widely

used polymyxin group of antibiotics

has previously been shown, it was gen-

erally caused by mutation in individual

organisms, said Nigel Brown, presi-

dent of the Microbiology Society.

Security ministry admits most of worlds synthetic drugs made in ChinaChinas Ministry of Public Securi-

ty acknowledged that most synthet-

ic drugs sold worldwide are made in

China, Caixin reported, citing a state-

ment from ministry officials. The US

Drug Enforcement Administration

said in March it arrested a Chinese

citizen named Tian Haijun when he

arrived in America. He was accused of

shipping tons of synthetic drugs into

the United States from China. Zhao

Zhongchen, the director of the Drug

Control Bureau, said the China Food

and Drug Administration imposed

new controls covering 116 new psy-

choactive substances in October. How-

ever, he admitted the use of the Inter-

net to handle transactions made law

enforcement difficult.

NEWS ROUNDUP


10.92%

6

6%Wind Financial

6%

6128

40%

9

1.52340

78

IPO4

12

9IPO

222Sons and

Daughters

220

59

36


6.5%

Nigel Brown

50%

100%

49

20154

9

1.06

1664.6

14

14

MSCI

700

26%

18MSCI

MSCIA

3

116


Does bigger = better?

COVER STORY


Chinas big data dreams may be in for a rude awakening

COVER STORY

Actuarial Science. But try telling that to

Baidu, Alibaba or Tencent.

Analog to digitalBy and large, the business world under-

stands big data as defined by a widely

referenced report published by McK-

insey in 2011: datasets whose size is

beyond the ability of typical database

software tools to capture, store, man-

age, and analyze.

As with much discussion of big

data, popular doesnt mean precise, or

even useful. Yu preferred to focus on

big datas lack of clear purpose: Where

traditionally data might be collected

through a survey designed with some

objective in mind, big data is hoovered

up en masse to be sorted through later.

So much more data also means greater

potential to confuse correlation with

causationmistaking coincidental pat-

terns for meaningful trends.

Photos, Yu said, were an apt meta-

phor for the big data phenomenon, as

the switch from film to digital brought

the price of a picture down so low that

now dozens are snapped of even trivial

events, often preserving the redundant

or unimportant. And surely there is no

greater store of photos or redundant

and unimportant information than

the Internet, which is itself continu-

ally being mapped and analyzed by the

original big data outfits: Search engines.

Yet while Baidus success in parsing

Chinas walled-off corner of the net is

well-known, Yu bemoaned a ongoing

rarity of strong all-around data scien-

tists with the necessary knowledge of

math, statistics and computer science

required to navigate the field, much less

the business acumen to know when to

say no in the face of big figures.

The sales pitch was slick, to be

sure: Unmatched situational

awareness, even to the point

of outbreak prevention. Search queries

from across the country would flag the

early spread of influenza better even

than official government forecasts,

helping medical workers more effective-

ly focus their efforts to halt an embry-

onic epidemic.

The company: Google. The project:

Google Flu Trends. The prognosis: ter-

minaldiscontinued in 2014 after hav-

ing vastly over-projected outbreaks for

eleven months running. But not before

Baidu had a chance to come up with its

own take on the idea.

The signal was clear: Big data had

come to China in a big way, and with it

the attendant belief that the current era

of information inundation will solve all

of societys woes by revealing the hid-

den trends beneath our noses one data

point at a time. Party officials endorse

it; tech blogs constantly cover it; busi-

nesses cant get enough of it.

But there is also a serious gap in

understanding: Businesses are now

well-versed in the the futuristic poten-

tial of big data, while experienced

statisticians are all-too-familiar with

its present-day limitations. But how

else to attract investor funding? The

outcome is a business mindset that

demands the unending harvest of

everything that might one day prove

useful on the assumption that it will

bewithout stopping to consider the

consequences.

Big data doesnt mean the data is

accurate, said Philip Yu, co-author of

multiple books on data analysis and an

associate professor at Hong Kong Uni-

versitys Department of Statistics and


Significant digitsPerhaps none of Chinas internet busi-

ness behemoths is more apt to trumpet

the importance - or revenue-generating

potential - of its data than Alibaba and

its myriad affiliates and subsidiaries. To

herald the launch of a startup incubator

in October, founder and chief executive

Jack Ma declared that data will become

the biggest production material in the

future, it will become a public resource

like water, electricity and oil.

Never mind that the spot price for

crude oil tumbled that same day to

just US$48.25, down more than 44%

from a year before due to a price col-

lapse brought on by severe overcapac-

ity engendered by wild optimism about

future projected demand. The fact

remains that money is flowing to big

data on the basis of such prophecies.

The China Academy of Information

and Communication Technology, a

government think-tank, estimated in

September that annual spending on

big data-related services, software and

hardware would reach RMB11.59 bil-

lion (US$1.814 billion) this year. A

large chunk of that will come from

Alibaba, which in May of this year

became the fourth-largest hosting

company in the world and the larg-

est in China, according to UK-based

Internet research and services com-

pany Netcraft.

That money has translated to greater

processing power in the big data arms

race: In November Aliyun, Alibabas

cloud computing arm, won the prestig-

ious GraySort benchmark competition

by using 17 times more servers than the

likes of Google and Microsoft to sort

100 terabytes of data in six-and-a-half

minutes, 3.6 times faster than said com-

petition.

For all that processing power, how-

ever, the company has struggled to spin

gold from the straw of its e-commerce

operations user data, even for a much-

hyped credit score service meant to give

users of its payment platform loans on

the cheap.

Buy diapers, get creditMultiple sociological studies indicate

that a person is more likely to default

if their friends and family have default-

edhence the hype that accompanied

Facebooks purchase of a patent for the

use of social networks in credit ratings,

and the drive in China use digital per-

sonal networks as the basis for an alter-

native to the kind of credit score most

on the mainland currently lack.

Alibaba was first out of the gate this

year in March when it began offering a

credit rating service through subsidiary

Sesame Credit Management. Echoing

the above-mentioned studies, Sesames

director of business development, Deng

Yiming, told Caixin that users would

score higher based on the ratings of

the people with whom they had money

transfers.

Technology director Li Yingyun

added that shopping habits and lifestyle

also played a role: Someone who plays

video games for 10 hours a day, for

example, would be considered an idle

person, and someone who frequently

buys diapers would be considered as

probably a parent, who on balance is

more likely to have a sense of respon-

sibility.

Ostensibly this all makes it a little

easier for the little guy in China to get a

loan. But the problems with this kind of

credit calculus are easy to envision.

Scholars in the US have pointed

out that even if online social networks

didnt often differ from actual relation-

ship networks cited in studies, social

credit evaluation could end up perpetu-

ating the socioeconomic status quo by

placing poorer communities at a sub-

stantial disadvantage. Unless, of course,

they game the system.

People are savvy. As soon as they

COVER STORY


COVER STORY

realize a certain metric is being used,

they can adjust, said Larry Salibra,

software engineer and founder of the

south China-based software glitch-

detection services firm Pay4Bugs.

Indeed, regularly purchasing diapers

in bulk as an expectant mother might

could well push the score of a young

single male above the threshold for nifty

benefits offered by Sesame Credit to

high-scoring users, like booking a hotel

room without a cash deposit.

But with Alibaba so quick to mon-

etize its data, the firm is introducing

users to the idea of their behavioral sta-

tistics being used for profitable ends far

more quickly than has been the case

in other marketswith the exception,

perhaps, of targeted advertising.

Diminishing returnsThe efficacy of online advertising has

drawn greater global attention in recent

years as methods of abuse and result-

ing countermeasures have grown more

elaborate. Entire armies of unwilling

computers are regularly infected by

viruses whose sole purpose is to con-

script more CPUs to click on targeted

ads, all to meet click-through quotas.

Salibra noted that while this problem

is far from unique to China, so-called

botnets are particularly easy to find on

the mainlandanythings available on

Taobao, he said, half in jest.

Hence the appeal of going through

Tencents social network and online

services app WeChata captive audi-

ence with plenty of ready intel that

companies can use to tailor their con-

tent for a surgical strike on consumers

wallets.

If only. As explained in a white paper

from WeChat consulting services firm

WalktheChat, the top options available

to advertisers on Tencents showcase

service are ineffective, expensive or both.

Less expensive adverts delivered

through large public-facing accounts

amount to a poorly targeted plat-

form with average prices, low visibility

and low conversion rate, in Walkthe-

Chats words (meaning few resulting

purchases).

The other option is shelling out far

more for expensive Moments ads that

show up in large numbers of user feeds,

regardless of what or whom they follow

on the platform. Attempts to use this

option have thus far met with visceral

backlashthough perhaps not in the

way one might expect.

When Coke and BMW became

among the first firms to take out

Moments ads in January, user reac-

tions ranged from annoyed to out-

raged. In contrast to privacy minded

Facebookers, WeChat users were most

vocally upset over not being targeted

for a BMW ad. After all, being served a

Coke ad implied users were low-income

nobodies by comparison.

The only effective option may be

paying influential WeChat users - Key

Opinion Leaders - to run ads in their

feeds or even directly plug products, the

cost of which WalktheChat estimated

could range from RMB5,000-50,000.

But even here fake KOL accounts are

common, able to masquerade as the

real deal by stealing content from other

accounts and buying botnets to supply

the clicks needed to drive up each posts

view count.

The consulting firm pointed to plen-

ty of reason for advertisers to cheat:

If your marketing managers bonus is

indexed on the number of new follow-

ers he or she gets to your account


COVER STORY

with a super-tight budget, there is

clear incentive for misbehaving.

Inputs and outputsIn short, said Hong Kong Unversitys

Yu, and despite the size-centric monik-

er, big data success is not chiefly a mat-

ter of quantity.

The quality of the data, how accu-

rate, reliable it is. This is the important

thing, Yu said, adding that HKU had

gone so far as to start a program specifi-

cally to address the industrys shortage

of well-rounded talent in greater China.

Yu-Xi Chau, a freelance statistician

and recent PhD graduate in complexity

science, pointed to the need for advanc-

es in artificial intelligence, the abil-

ity for machines to have insights that

humans cannot fully understand. That

has been the chief focus of Baidus big

data initiative, which in 2014 trumpeted

its own success in predicting the winner

of every match of the 2014 FIFA World

Cup.

But football is a far cry from the

complexities of epidemiology. Baidus

Google-inspired influenza forecasting

project also speaks to another major

drawback of big data: Corporate secrecy

that keeps independent third parties

from vetting firms underlying algo-

rithms.

That is by no means the sole domain

of China. But for all of its flaws, Google

Flu Trends provided historical data that

reached back to its launch, allowing sci-

entists to track just how far afield its

predictions eventually fell. Baidus fore-

casting service is still online, but only

provides users with forecasting records

from the last 30 days.

Whether that relationship is causal

or simply correlation is impossible to

sayat least without more data.


In China, big data has its own quirks to work out

While big data in China sharesmany features with the indus-trysotheriterationsabroad,perhaps

no other country has embraced the

conceptsoreadilyatleastonpaper.

InSeptembertheStateCouncilis-

suedguidelinestoboostthedevelop-

ment of big data in China, requiring

not only greater sharing of govern-

ment-collecteddataonasharedplat-

form, but support for major home-

grown data firms that could become

world-beaters.

Thatmightbealittleover-optimis-

tic,atleastfornow.

Yu-XiChau,afreelancestatistician

andrecentPhDgraduateincomplex-

ityscience-coveringmath,statistics

and computer science said that in

both Hong Kong and China, top-tier

statistical talentwas inshortsupply,

andaddedthatevenpromisinggrads

faced huge pressure upon entering

theindustry.

When [investors] talk about big

datatheydontreallyunderstandthe

limitations,Chausaid.Corporatecul-

turefocusedonfastresultshaspro-

ducedaglutprojectsinbothinChina

andelsewherethatmayusethedata

companies have at hand, but is not

doingthingsthatareusefulinastat-

isticianseye.

Philip Yu, co-author of multiple

booksondata analysis andanasso-

ciateprofessoratHongKongUniver-

sitys Department of Statistics and

ActuarialScience,agreed,notingthat

COVER STORY


hisuniversityhadrecentlyintroduceda

newmajor-decisionanalytics-tohelp

remedytheregionsdearthofdatasci-

entists.

There is also the relative youth

of data-gathering projects in China:

Wherebigdatahasbeenaroundinthe

USforaroundadecade,mainlandtech

firmshavehadjustunderhalfthattime

totrackstats.

Data isavery typicalproblem[for

businesses], Yu said. They want to

startprojectsbuttheyneedtocollect

theinfoforsometimefirst.Ifnot,they

cantdoanything.

That lack of historymay be one of

themajormotivationsbehindthelatest

roundofinvestmentandacquisitionsin

ChinasITsector:Bysnappingupfirms

withvaluabledata,industrygiantscan

broadentheircoveragetonewsectors

liketrafficanalysisorfooddelivery.

That in turn, isdrivingbigdataas-

pirations among start ups hoping to

attract funding from - or even better,

get bought out by - Baidu, Alibaba or

Tencent.Chauwasopenlyskepticalof

recent funding valuations, comparing

thecurrentwaveofinvestmentindata-

centrictechfirmstothedot-comboom

ofthe90sintheUnitedStates.Thanks

to a mismatch between expectations

andreality,hesaid,thebusinesssideis

imbuingbigdatawithalevelofabilityit

doesntyetpossess.

Eventually, when industry knows

more, the gap might be overcome.

Though it might take years, Chau

said.ButBeijing,henotes,wantsdata-

enabled breakthroughs in economic

growthnow,andtheeasyoptionisto

turntobigdata.

Chausaidthatregardlessofwheth-

er it worked or not, big datawas an

easier option to turn to in China be-

cause privacy laws are so laxthey

care less about legal issues. Indeed,

atpresentthereisalackofanylegisla-

tiondefiningwhatpersonalinformation

evenmeans.

Therelevantlegislationisallatthe

[local]ministeriallevel,saidZhaoYun,

directoroftheCentreforChineseLaw

at Hong Kong University. While gains

had been made in recent years with

various lower-level guidelines, Zhao

said, there was still no national-level

legislationprotecting,orevendefining,

personaldataonthemainland.

Making progress on that frontmay

prove more difficult than Zhao would

preferthankstoapathyfromChinasne-

tizens about data privacy issueseven

whenitpertainstotheirdatinglives.

InlateNovemberLarrySalibra,soft-

wareengineerandfounderofthesouth

China-based software glitch-detection

servicesfirmPay4Bugs,discoveredthe

popularChinesedatingappTantanwas

failingtoencryptprivatedataittrans-

mitted, exposing users to potential

identitytheft,orworse.

The interesting thingabout that is

therewasjustnointerestin[mainland]

China,Salibrasaid.Whileacoupleof

Chinese-languagepublicationsinHong

Kongcovered thediscovery,mainland

publications completely ignored it, he

said.

Butheaddedthatwithinsocialnet-

works,Chineseusers seemed to take

farmoreadvantageof privacyoptions

toshieldcertainmembersoftheirnet-

worksfromseeingselectactivities.

Normal people who are married

and out having lunch with their mis-

tress, theyll post the picture on We-

Chatbutonalistthatblockstheirwife

from viewing it, he said. Thatmeans

amajordatabreachcouldhavedisas-

trousconsequencesforthosewhoare

ignoranttohoweasilyleakedtheirper-

sonalinformationmightbe

Butbyfarthemostremarked-upon

feature of Chinas big data landscape

is the penchant among users to ma-

nipulatedatawheneveritmightbenefit

themmuchasisalreadythecasefor

traditionalstatistics.

One of the biggest problems is

whether you can trust the data going

intothesystem,Salibrasaid,pointing

to credit scoring as an example (see

main story, p22). Yuwasmore direct,

citinganoldstatisticiansmantra:Its

garbagein,garbageout.

PCPC+ |


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Edward Tufte


Alex Wong, President of SPACE Asset Management Group, talks about industry development driven by Internet+

The Era of Big Data

In recent years, Internet+

has permeated al l walks of

life. Internet+Agriculture has

given birth to agriculture branding;

Internet+Finance promotes the devel-

opment of financial service platforms;

Internet+Medical fosters new medi-

cal community modes represented by

real-time interaction. It is safe to say

that the Internet has overturned many

traditional business modes, changed

distribution channels for products and

transformed consumer behavior funda-

mentally.

As a full service chain business in

Chinas commercial real estate sec-

tor, SPACE is playing a positive role

on the industrys frontier with innova-

tive visions and practices. Depending

on acute market insight and enriched

creative ideas, SPACE has continually

expanded its business in the Big Data

Era by artfully integrating the Internet

with its own resources. In addition to

business, it has extended into various

other fields such as culture, technol-

ogy and education, arming the Group

with inexhaustible vitality in the Inter-

net Age.

The Big Date Era has overturned

traditional business mode and also

brought many new opportunities, said

Alex Wong, President of SPACE. From

his perspective, as a result of the impact

of the Internets development and

e-business, the transformation of com-

mercial real estate has become a trend.

In project operation and promo-

tion, it is necessary to possess Internet

vision, explore optimization and update

marketing modes, realizing business

appreciation through value marketing,

he added.

In recent years, SPACE has been

conducting online-offline promotions

and operations to promote different

projects. In July this year, to prepare

for the Summer Carnival at Shang-

hai Touch Mall (Baoshan branch),

SPACE made use of the Intelligent

Digital Mall for a one-week directional

themed promotion, delivering messages

to millions of WeChat users and acquir-

ing hundreds of thousands of clicks. It

then made marketing plans according

to the collected big data and success-

fully met the demand of targeted group.

During 2015 CTXD World Music Festi-

val (Wuhan stop), SPACE carried out a

series of WeChat Shake Shakes activi-

ties on the spot, actively interacting with

participants and increasing the sales of

the mall.

I greatly stress the companys

advancement in the Internet and Inter-

net business applications, Alex Wong

said. SPACE has accumulated much

practical experience in this field and

has developed a diverse array of replica-

ble products which are accessible both

online and offline.

SPACE possesses many creative

brands including widely-applicable

business activity modes and theme

pavilions such as popupspace (ani-

mation exhibition and sales mode),

ecospace (education and sports experi-

ence pavilion), o2ospace (animation

theme pavilion), elecspace (automatic

vending and exchange system of ani-

mation products), and spacemirai.com

(online-offline electronic platform of

animation industry), etc.

These self-owned brands and

products of diverse forms cover dif-

ferent fields and demonstrate global-

ly advanced business visions, creat-

ing unique a character for different

projects.

Based on SPACE inherent resourc-

es, we launched o2ospace Mall, comb-

ing online and offline promotions to

help developers create competitive

and characteristic business programs.

We provide all-round services includ-

ing planning, investment attraction,

designing and operating management

to optimize project value increments for

developers, Alex Wong said, adding

that SPACE hopes to realize value incre-

ment optimization through transform-

ing the big data it collected into effective

Alex Wong/


+

++

+

+

7

2015

pop-

upspaceeco-

space

o2ospace

spacemirai.com

o2ospace Mall

data that has guiding significance via

integration of online and offline media

promotions, application of Internet

technology and development of its own

electronic platform Spacemirai.com.

The key to commercial real estate

operations in the future will lie in expe-

rience and differentiation. It is neces-

sary to continue to explore the way to

create smart business projects that aim

at creation and are supported by sci-

ence and technology. We will cast our

eyes to a broader spectrum, not only the

animation field, but also the wellbeing

industry, which draws increasing atten-

tion, and education and sports online-

offline industrial platform, which own

large room for development, he said.

Surely, the real value of the Inter-

net rests in the combination of it with

traditional industry, which brings sub-

stantial changes to the latter. Mr. Alex

Wong says he keeps a close eye on the

development of Internet technology

and upcoming effects. He also con-

stantly looks for ways to combine the

Internet with other industries to realize

more breakthroughs and innovations,

and drive the integration and advance-

ment of Internet+culture, innovation,

science and technology and business

generally. (The article is offered by

SPACE)

spacemirai.com



Historical perspective on Chinas property market

Very often, at

s ome r e c en t

social gather-

ings, friends of mine have

approached me and raises

questions about the prop-

erty market, expecting me

to revert with some insider opinion.

Instead of throwing back some casual

and off-the-cuff comments, I would

prefer to spend more time studying the

perspectives of history as it impacts on

their questions.

First of all, I will ask myself a ques-

tion: Is the China economy in the com-

ing two to three decades on the rise or

in decline? It is only worth investing in

a countrys property market if the over-

all economy is on the rise. China and

Japan, for example, are two countries

with economies going in opposite direc-

tions. For China, the economy has seen

continuous and steady growth since

Dengs visit to the south in the early

1990s; Japan has been on a deep-rooted

downtrend since the bubble burst in

the early 1990s and is sadly still lost.

Obviously, any time during this period,

the return from property investments

in Beijing, Shanghai, Guangzhou and

Shenzhen must have been lucrative.

Needless to say, the investment funds

would have vanished if we had made

the same move in Japan. It is always

easy to walk with the wind but not

against. As Jack Ma says: Pigs will fly

high when the wind is strong.

In the long history of China, with its

population size and economic poten-

tial, occupying 30% of global GDP is

normal and reasonable. The figure of

1-2% in the late Qing is abnormal in

any sense. The latest figure of 14% for

2014 means there is still huge room for

growth.

CULTURE MAP

Dr. Kenny C.Y. SIU


HONG KONG its role and importance in the futureIf you have faith in the future of China,

you have to select your city to invest in.

Like the stock market, the most cur-

rently popular names are those like

Tencent (00700), Construction Bank

(00939), as opposed to HSBC (00005)

and SHK property (00016) in the past.

The same rule applies to the property

market - Beijing, Shanghai, Guangzhou,

Shenzhen and Hong Kong are on top

of the list. Counting back thousands of

years in history, it was Changan (now

Xian), Luoyang, Yangzhou, Nanjing.

Time is ruthless; those cities faded as

time passed and now rank as second-

tier. So goes HSBC and SHK Property

in the stock market game.

I was born in Hong Kong and

therefore have a special emotion tie

with the city, though still, I am sad-

dened to have to predict that in longer

run, Hong Kong will become a sec-

ond-tier city. When you scrutinize the

Hong Kong stocks and the Chinese-

based stock composition in overall

transactions, you will understand what

I am saying. Starting from the end of

2013, the daily stock transaction of

state-owned enterprises accounted for

more than 40 percent of HS futures,

and the figure is still on the rise. Some-

how, the importance of Hong Kong is

declining.

Yokohama, once the most prosper-

ous city during Japans times of seclu-

sion, was replaced by Tokyo and Osaka

once the nation was opened up. My

personal view is that Shanghai will one

day overtake Hong Kong and becom-

ing the center of Chinas stock trading

a role as important as New York in

United States. Hong Kong will become

a Chicago and take a second role.

Decades of Good Time leftGiven its excellent infrastructure and all

other advantages, Hong Kong, though

on the way down, can still enjoy some

decades of taking the leading role,

before stepping into the best of the

second-tiers.

No matter now or back in history,

a disparity between the rich and poor

is inevitable. Du Fu wrote, The poor

scholars will be cheered when they have

their mansions. The Book of Han says,

The fields owned by the rich cover

miles upon miles; the poor dont have a

place to live. It is an undisputable fact

that life in big cities must be expensive

and difficult.

With basic agreement that the China

economy is booming and once you have

your cities chosen, it is never an issue

about when to make the real purchase.

Changes in price within a 20-30 percent

range, for a real long-term capital invest-

ment that lasts for almost 20-30 years,

mean nothing, especially you are expect-

ing a yield at double, triple or even more.

Aim at the watermelon, not its seeds.

My humble advice to the younger

generation - if conditions allow, you

must have your own place to live. You

never know what runs faster - your sal-

ary growth or the property market. It is

a gamble if you do not have your own

place for shelter.

CULTURE MAP

Dr. Kenny C.Y. SIU

PhD. in Economics

(Jiangxi Uni. of Fin. and Econ.)

MBA, MRICS, MCIH, MHKSI

GDP 30%

2014GDP14%

0070000939

00016

2013

1997

00363

0039200270

12

2009

97

12

-

|


WARenew

20151128WARenewAhvie HerskowitzRobin WillcourtJoseph BrennerWA

WA

WA

CEO

WA

WA

Renew

RenewWA

-Memorial Sloan Kettering Cancer Cen-

terJoseph Brenner

Joseph Brenner

-2014-2015

-

.The Johns Hopkins Hospital

Ahvie Herskowitz

.

WADerek MuhsWA

WA

WARenewRenew

WAWA1990

WA

2012

WA

2015WA

Derek Muhs



FEATURE STORY

Shanghais go-to spots for the ultimate night out

Mortons of Chicago, The Steakhouse and Mortons Steak and Seafood Grille

As the holiday season is ushered in

this year with a gust of cold wind,

a warm evening with a cocktail in

hand and hearty meal set down in front of

you sounds more appealing than ever. In

Shanghai, Mortons The Steakhouse is the

place to go for just thatand more. A long-

time treasure trove for people searching for

the best in fine dining to relax and unwind

after a long day, Mortons offers customers a

truly enviable selection of prime cuts of steak,

seafood and a wine list of over 250 interna-

tional wine labels. With a rich and pleasant

environment that offers the quintessential

American steakhouse experience, it should

come as no surprise that Mortons is nicely

suited for year-end company parties, business

dinners, family get-togethers and the classic

after-work cocktail this holiday season.

And what holiday season is complete

without a few perks? Mortons is now giving

patrons a unique opportunity for fine dining

on the house. We are delighted to offer a

Mortons Holiday Gift Card promotion, just

in time for the winter season, says Mortons

The Steakhouse General Manager Frederic

Fuseau. Its our way of saying thank you to

our loyal customers, and to get everyone in

the holiday spirit with the Mortons dining

experience we have all come to cherish.

From November 1, 2015 to January 31,

2016, customers who purchase a RMB2500

Mortons Holiday Gift Card will receive a

MortonsSteakandSeafoodGrillelocatedattheiapmMall

MortonsofChicago,TheSteakhouselocatedattheifcMall


FEATURE STORY

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1 and April 30, 2016 (excluding Feb-

ruary 14, 2016). The Mortons Gift

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purchase date, giving customers the

perfect reason to come back to Mor-

tons time and time again to indulge in

some of the best cuisine at Shanghais

favorite steakhouse. Mortons will also

customize event menus upon request,

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Diners have the luxury of choos-

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Mortons Steak and Seafood Grille

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steak. Dine on Center-Cut Ribeye,

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And with this new Holiday Gift Card

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With a generous plate of food and a

full glass, dining at Mortons will cre-

ate treasured memories for years to

come. As the holidays come around,

Mortons will continue to be the crown

jewel of fine dining.


ECONOMY

David Bandurski is best known

for his work at the University

of Hong Kongs China Media

Project, where he breaks down develop-

ing trends in both state and commer-

cial publications. That makes his new

book following the struggles of a village

attempting to fend off the encroaching

city of Guangzhou a departure from his

typical wheelhouseabeit a welcome

one. China Economic Review recently

spoke to Bandurski about the decade-

long story behind his book, the unique-

ly Chinese phenomenon of urban vil-

lages and the difficulties faced by all

sides in Chinas ongoing drive toward

urbanization.

Ive seen plenty of books that concern Chinas urbanization, but few have gone into much detail about urban villages other than to address them at an abstract level in terms of hukou (registered residence) status and land rights categories. What prompted you to take on the topic at book length?Youre absolutely right, if you look

for info on urban villages in china

youll be taken to not actually practic-

ing urban planners, but urban plan-

ners in an academic setting, looking at

the issue of planning urban spaces in

an abstract way; youll find architects

writing about urban villages, and this

sort of thing. But I was very interested

when I discovered them for myself

back in early 2005. I was here in Hong

Kong and saw images of them [while]

watching a documentary on them

and started reading about them. The

term was new to me, chengzhongcun

(), literally villages within the

city.

The more I read, the more I thought,

wow, this is really fascinating these are

pockets of rural china in the middle

of Chinas biggest booming cities. And

theyre real rural spaces, so theyre very

unique, and as you said I hadnt really

seen a lot of writing about them and the

Dragons in diamond villageQ&A: David Bandurski on Chinas urban villages and the outlook for urbanization


ECONOMY

social issues that sort of congregate in

these spaces.

So thats really what prompted it. I

thought I had foundand I still think

thissort of the secret ingredient of

Chinas urbanization. And what I mean

by that is: We know when we talk about

urbanization were referring to peo-

plehuman beingsmoving from

rural lives in rural settings to urban lives

in urban environments. Thats what

urbanization means. But of course in

China were always hearing about the

floating population, the migrant work-

ers in Chinas cities.

We know that by 2050 over a quarter

of a billion people will enter Chinas

cities, but will they become urban resi-

dents? Will they have hukou? Weve

heard some of the institutional and eco-

nomic aspects of this story of urbaniza-

tion and we have to ask, is this a real

urbanization? Are these people becom-

ing real urban residents? And the

answer, in a way, is no.

This is why we call them floating, its

a term in Chinese (). Theyre

floating because they never arrive in the

city, and by that I mean the city thats

built for them, [those] that the leaders

build as prestige cities. When we think

of Shanghai and Pudong, and we think

of Guangzhou and the central business

district, these urban spaces are not built

for the vast majority of people who are

really the whole phenomenon of urban-

ization in China. Where do they live?

The first answer is factory dorms.

But thats just a small portion of where

migrants live, because think about it:

Youre a migrant worker in your late

20s, and youre in a segregated dorm?

How are you going to get married, how

are you going to have children, how are

you going to have a sustainable life in

the city? You need a space, you need a

room within the city that is your own,

outside of the factory. And that is the

urban village. And theyre everywhere.

Theyre not just in Shenzhen or

Guangzhou. The Pearl River Delta has

a great number of them because of the

migrant waves, but [the urban village]

is really the answer to the question,

Where are they? And its one that, as

youve said, no ones really looked at

in-depth. So thats what really fasci-

nated me about the space of the urban

villages, and thats why I chose them as

places to report stories, rather than the

topicbecause Im not really focused

on the topic of urbanization per se, as

much as stories about land, etc. happen-

ing in the urban villages.

How did you end up settling on Xian Village as your narrative focal point?It was a long process because in the past

Ive done very topical books, like Inves-

tigative Journalism in China, where you

think of maybe eight or ten chapters

and you divide them up into stories

and issues. So I had a lot of stories I was

working on including about migrants,

and some of them are not in the book.

Most of the ones focused on migrant

workers in the villages did not become

the focus although I have those stories.

It was quite late in the process,

around 2011, 12 when I went back

and Xian Village had always been one

of my favorite urban villages to go and

eat in, and walk around and explore,

and I discovered to my surprise and

dismay that the village had been sur-

rounded by this huge containing wall.

It looked to me like this place was going

to be demolished in six months, so my

thought was: Lets write a history of a

disappearing village in the middle of

this city. You know, what an opportuni-

ty to go back and talk to the old villagers

about the history and the transforma-

tion and the disappearance of this place.

No one wanted to talk about history.

Everyone wanted to talk about corrup-

tion, land politics, and to the extent that

I could see history and culture it was

playing into the rights defense move-

ment, it was playing into the politics

of resistance. So the title of the book,

Dragons in Diamond Village, is a ref-

erence to the use of the dragon boat

parade, an ancient ritual in this area,

to gather resistance against the cor-

rupt village leaders. So the question of

whether the boats will return to the vil-

lagebecause they werent allowed to

raceis the question of where the story

is going in terms of land and corrup-

tion, heritage, everything.

So in that sense I have to say, I

defend my use of dragons in the title.

Mine is one of a very few over the last

decade that deserved dragons in the

title. Its a very local reference, its not

a colonialist appropriation of Chinese

symbology or something like that. The

symbolism is not mine, its the villag-

ers.

You mentioned how everything sort of came back to the corrup-tion, the land politics... to what extent does urban development and redevelopment still rely on official corruption? Your de-scription of the concentration of power in the hands of one village overlord in particular struck me as more than a little similar to the kind you see on a national scale.Its Identical. As I was investigating

Xian villages corruption issues


ECONOMY

and this involves Poly Group of

course, which had a princeling running

itI had a sense that China is a vil-

lage. Theres a small group of officials,

princelings, call them what you will,

hongerdai, second-generation reds,

fuerdai, the sons and daughters of the

rich, and theyre a very small number of

people. In the same sense that a village

has two or three thousand members,

so does the extreme elite that actually

controls most of the wealth, much of it

invested in land, across China.

So its no accident that many of the

stories in my book... probably all of

them indirectly or actually quite direct-

ly, interests that are national. So you

have Poly Group which was up to 2010

run by the son-in-law of Deng Xiaop-

ing, so thats about as senior as they get,

theyre very involved in a lot of projects

in Guangzhou, and theyre the ones

wholl redevelop the village. And its still

in the air, whats going to happen...

And certainly I was really interested

in looking at corruption at the local

level as well. Xi Jinping has talked about

tigers and flies, and I think the issue of

the flies, of smaller corruption, is much

more key to political stability and the

success of anti-corruption, etc., because

the corrpution of these low-level offi-

cialsvillage and county officials

affect Chinese on a much more direct

level than say, Zhou Yongkang or Bo

Xilai, these kinds of cases.

And in my experiences reporting this

book and going back now, very little

is being done. Villagers are facing the

same situation now that they were three

years ago, four years ago when I was in

the thick of it. Theres still no account-

ability for village officials, and they have

basically a blank check to do these land

dealsand theyre working with district

officials and city officials.

From your descriptions of Guangzhous urban villages they sounded a little taller, if not dens-er, than the ones Id seen walking around inside Beijings Third Ring Road. I know your book is centered on the Pearl River Delta, but I was wondering if youd no-ticed regional differences in how urban villages form.Absolutely. I was also in Zhengzhou,

and Changsha was anotherin Chang-

sha I found the urban villages quite

similar [to those of Guangzhou], and of

course were in the South still. A lot of it

has to do with the economies in various

areas. Of course the Pearl River Delta

was developing earlier: Its relying very

much on manufacturing, even having a

lot of small sweat shop operations that

are on village land. So these villages are

not just residential. They have collective

properties - so they might have shoe


ECONOMY

factories, or parts factories, that kind of

thing - where theyre attracting laborers

who are living in the tenement housing,

but theyre also working nearby.

What you see in Beijing, youre abso-

lutely right, you tend to have a lot of

Henan migrants who are doing, for

example, recycling. So these spaces, the

zhaijidi or residential areas are

also used as warehousing areas. I spent

a lot of time in a village called Trash

Village, Lajicun , up in an area

called Dongxiaokou . And these

were all Henan migrants, they were liv-

ing there in little hovels, but they were

one-story, and they were using land

next-door, renting it out to store wiring

(theyd strip the copper out) or plas-

tics, and they would basically run recy-

cling enterprises. They can still be quite

dense, so you can still have twenty, thir-

ty thousand migrants living in a small

village, but theyre not as built-up as the

villages in the South.

But you see this dynamic absolute-

ly everywhere. I think it doesnt really

matter where you are: On the outskirts

of the city, sometimes closer in to the

main development area, youll see these

rural spaces that are being used to sup-

port a grey economy, and its a mat-

ter of what kind of economic activity

youre looking at... Sometimes you have

to be creative and know where to look

for them. Theyre actually hiding, often

behind new, prestige architecture and

that sort of thing.

So what determines the resilience or vulnerability of an urban village? Why do some hold out longer than others?In the case of Guangzhou, for example,

some of the major factors are the vil-

lagers themselves and how united they

areso if they have a strong sense of

community, if the leadership is more

collective. In some cases they dont real-

ly have the emergence of a dictator, if

you will; in the case of Xian village it

has a sort of local tyrant, and you see

this in a lot of villages where they have

immense power and develop these con-

nections with other local leaders. But

if villagers stick together they have a

better opportunity to resist the regen-

eration plans of the city or to make their

own demands about how the process is

done.

And you have villages like Shipai

, very close to Xian village in

Guangzhou, which is untouched and

will probably remain untouched for

the foreseeable future because its in

a major urban area and if they try to

move on the village it will get nasty.

And this is the thing, Chinese leaders

very risk averse and so the villagers, if

theyre doing rights defense they know

thiswell every rights defender knows

this, right? Its a tactic: you make lots

of noise, you attract a lot of atten-


ECONOMY

tion, and [leaders] tend to be more

cautious in dealing with you, and they

might negotiate with you. You see this

again and again in my book, this tactic

of rights defense.

So that really decides it, and in some

areas the governments may be more

aggressive in dealing with land seizure,

because again theyre not under so

much scrutiny as you would be in a

major city. Its a real problem [for lead-

ers] in a city like Guangzhou, or Beijing,

you have a concentration of media as

well in these areas. So its mostly about

scrutiny and the local community and

how united they are.

A little over a year ago CER looked into the State Councils announcement that it was going to abolish the rural-urban dis-tinction for hukou. Has that had much effect at all for the people youve been talking to? I think the problem is a really difficult

issue, and I think with China having

dealt with the one-child policy now,

down the road I think the hukou sys-

tem is going to be something theyll

have to deal with. But in many ways

were past the point where changing

hukou status will mean a areal sub-

stantive change for peoples lives

because they need to have programs to

actually provide the infrastructure, for

example, for social programs, whether

its healthcare, or educationand a

lot of things are being provided in the

cities informally, and again, in urban

villages.

When I was in Beijing I was report-

ing on migrant schools, and migrant

schoolsillegal schools run by

migrants, for migrantsare concen-

trated in the urban villages. So if you

go to Dongxiaokou where I was, thats

where youll find them.

So you have to provide the servic-

es for the people that are in the cities,

and the cities dont want to do this on

their own. Theyre waiting for some-

one else to jump first. Its a real prob-

lem. Because you look at an area like

[the one] outside Shenzhen, and you

have hundreds of thousands of work-

ers, many of them living in villages,

not factory dorms. And if you consid-

er their interests - if they were voters,

for example - they would want to have

their children there, and they would say:

We need more schools, we need more

classrooms, we need more teachers.

But [migrants] are not calculated in the

local mathematics for social benefits.

The schools that are built locally are for

local residents with hukou.

So really you can talk about chang-

ing an ID card, but really the big

question is about social benefits.... Li

Keqiang, the premier - although hes

saying it less now, I think its too dif-

ficult an issue - but hes talked about

human urbanization. This is the new

term, and this is an acknowledgement

that urbanization over the last two dec-

ades has focused on urban develop-

ment, building physical cities, and its

ignored, more or less, the human beings

that are really what urbanization is all

about.


ECONOMY

And this has to change. You have to

have urban environments that take into

account the urban population. So we

know theyre thinking about this and

they recognize that theres a real schism,

but solving it is going to be really dif-

ficult. Im not the policy guy on hukou,

and I wouldnt want to be. Its a night-

mare.

Another issue is going to be local

identity. In my book Im focus-

ing on the local-ruralIm focusing

on the villagers whose homes are in

Guangzhou, whose villages have been

there for a thousand years, who see

themselves as the real locals; and I dont

really look at the migrants so much.

But theres always a little bit of fric-

tion between these two worlds in the

cities. So the local villagers see them-

selves as one caste in a way; and then

the migrant workers are just kind of

coming through and theyre not really

local and theyre not really accepted;

and then you have the urban residents

with hukou. So theres going to be a

lot of resistance when they start to talk

about specific changes, and maybe a lot

of resentment too against the migrant

population.

That seems to track with what wed concluded in the piece, though its not exactly the kind of confirmation youre overjoyed to get.Then another issue is going to be hous-

ingand Im kind of posing another

question for you here because I saw

recently you guys had written about

the residential property glut, and the

figures for residential housing, which is

a really interesting issue. But Ive always

been fascinated by the fact that theres

essentially two markets in China, and

the urban village is a separate grey real

estate market, and the one that has been

fulfilling this demand represented by

migrant workers in the city.

What we call the housing market in

China in most cases is not even a real

hosuing market. It is so far over the

heads of the new urbanites, the migrant

workers that its hopeless! And so you

think: How are they going to deal with

this? Is the formal real estate market

going to correct to take into account

the grey market, in which case wed see

a dramatic drop in prices; or are they

going to try to get through this period

with subsidized low-income housing?

Right now theres talk about low-

income housing, but think about Shen-

zhen! Its hard to get hard statistics, but

if you have a city with say 12 milllion

people, and you have 2 million who

have urban hukou and probably own

real estate, and then you have anoth-

er 10 million who are various kinds

of migrants, some may have college

degrees, some may not, etc.but you

could be talking four or five million

people who are living (and this is prob-

ably conservative) in an urban village

environment. Theyre living in gray

housing economy.

If you were to build low-income

housing for those five million peo-

ple, can you imagine how much that

would cost? And how much room it

would take? I mean Hong Kong is talk-

ing about building some more of this

housing over the next ten years, and

its a total headache. Its nothing close

to [Shenzhen]... So I think about this

problem and, as I say in the intro: Are

you going to build a new Singapore to

house this population?

So how to house urban China is a

real problem, but we kind of ignore it in

the economics. They get very simplistic.

Youll hear a banker say, Well Chinas

got 250 million new people going to the

cities in the next half-century, theres

unlimited demand into the future for

housing. And the basic math sounds

right, but the problem is that the real

estate prices already are so high that in

many cases a migrant worker is talk-

ing about 200 years of gross income to

even afford an apartment of any size

on the outskirts of the city. So I think

this is a big issue for the long term for

the cities, and this is why theyre push-

ing reverse migration, theyre hoping

they can get cities in inland China


ECONOMY

to develop, and the maybe some of

the migrant populations will move back

into these areas. So thats been another

sort of push.

Having looked into that a bit, it didnt seem to me as if the if you build it they will come model was actually drawing a lot of people away from the coast.No, and that was my experience going

to Henan. The people would say Ok,

but the jobs are in Beijing, the opportu-

nities are in

CER Dec. 2015

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Transcript of CER Dec. 2015