The War for China's Wallet

Profiting from the New World Order

Shaun Rein

• Publisher: De Gruyter
• Year: 2017
• eBook ISBN: 9781501507519
• Edition: 1
• Topic: Economics
• Subtopic: Business General
• Index: Economics

With Chinese-led initiatives such as One Belt One Road (OBOR) and the Asian Infrastructure Investment Bank (AIIB) combined with uncertainty due to US shifts in policy and apparent commitments over the past decade, the stakes are high for companies looking to profit from the world's newest superpower.

Post-financial crisis, China has emerged as the largest or second largest trading partner for most countries. It has become the second largest market for Fortune 500 companies like Starbucks, Apple, and Nike and drives growth for Hollywood and commodity products. Yet the profits come at a price for countries and companies alike—they must adhere to the political goals of Beijing or else face economic punishment or outright banishment. Using primary research from interviews with hundreds of business executives and government officials, The War for China's Wallet will help companies understand how to profit from China's outbound economic plans as well as a shifting consumer base that is increasingly nationalistic. The countries and companies that get it right will benefit from China's wallet but those that do not will lose out on the world's largest growth engine for the next two decades.

Click here for information on the author's MSNBC interview:

https://mobile.twitter.com/OARichardEngel/status/1147861623211798528

Check out the interviews at Bloomberg, Forbes, and Marketplace on this book:

https://www.bloomberg.com/news/audio/2017-12-05/those-who-heed-china-s-political-ambitions-will-benefit

https://www.forbes.com/sites/russellflannery/2017/11/28/how-to-profit-from-chinas-rising-nationalism/amp/

https://www.marketplace.org/2017/12/18/world/shaun-rein-interview

Financial Times subscribers can read this review of The War for China's Wallet:

https://www.ft.com/content/b6bb55c4-e4b4-11e7-97e2-916d4fbac0da

The book's review in South China Morning Post can be read at:

http://m.scmp.com/culture/books/article/2126477/book-review-war-chinas-wallet-readable-if-one-sided-view-chinas

Chapter 1
China’s Economic Hammer

Manila, Philippines, March 1996

U.S. First Lady Hillary Clinton readied herself to testify in Washington, D.C., amid the spreading Whitewater scandal. On the other side of the globe, I was living in Manila, capital of the Philippines and “Pearl of the Orient.” In both capitals and at discos around the world blared the pop song Macarena by one-hit wonder Los del Río. Schoolkids and adults alike shook to the Spanish beat in synchronized dance.

It was one of those searing hot days in Manila, where you can fry an egg by cracking it open onto the scorching black tar of the street. I had just finished lecturing at Trinity College of Quezon City, where I was spending the semester, when I made my way to the Manila Hotel. Built at the behest of American President William Howard Taft (1909–1913)—soon to assume the position of the Philippines’ first civilian Governor-General—the hotel was officially opened on July 4, 1912. In celebration of America’s Independence Day, the hotel’s inauguration underscored the Philippines’ closeness to the U.S. To this day, many Filipinos call their country America’s 51st state.

Two decades later, the Manila Hotel continued to serve as a site for U.S. government involvement. Holding court as Military Advisor and Field Marshal to the Commonwealth Government of the Philippines, United States Five-Star General Douglas MacArthur operated out of the Manila Hotel from 1935–1941. From his penthouse suite, MacArthur built a blueprint for the Philippines’ future and laid the groundwork for American hegemony in Asia, plans that began enactment under his dominating gaze.

Awed by the hotel’s history, I entered its stately lobby doors. I wondered how many military planning sessions General MacArthur must have held within these walls, strategizing with Filipino leaders such as Manuel L. Quezon1 or House Speaker Benigno Aquino Sr., whose grandson and namesake would become the Philippines’ president seven decades later. Few buildings in the world stood as a greater testament to American power abroad.

While most Americans do not think of their country as a colonial power as they would the British, Dutch, or French empires, the United States effectively colonized the Philippines during the 20th century. MacArthur, Taft, and other American officials cherry-picked families like the Aquinos to dominate generations of local politics. English became one of the nation’s two official languages, right alongside Filipino.

Flooded with thoughts of the site’s significance, I made my way to a table in the corner of the room where Commodore Al Santos and his wife Ester waited for me to have afternoon tea. Dressed in a simply embroidered, cream-colored Barong,2 Al Santos extended his hand to welcome me in a warm embrace. Having been a key figure in the navy under Ferdinand Marcos’ regime (1965–1986) in the 1960s and 70s, the now-retired Commodore Santos had notably stood out for his incorruptibility. Well-liked by both his superiors and subordinates, the Commodore had risen in the ranks despite refusing to bribe his way to the top.

The Commodore’s wife, Ester—previously in charge of running Trinity College of Quezon City and St. Luke’s Nursing School—had brought me to Trinity’s high school division to teach 9th grade English for a semester. With a petite frame and short hair that circled her face, Ester sat next to the retired Commodore, beckoning me to sit. Exuding warmth, Mrs. Santos seemed to wear a perpetual smile that curled from one ear to the other. To this day, I do not think I have met a finer couple that did more to help people find their paths in life. Regardless of someone’s affluence or upbringing, the Santos’ always had a kind and encouraging word to leave.

Slated to return soon to the U.S. to pursue my own university studies, I wanted to thank Ester and Al for arranging my semester of teaching. Moved by my experience and cognizant of the population’s needs, I wanted to know what I could do for the Philippines on an ongoing basis. Keen to learn from the Santos’ expertise, I also sought their advice in determining the next step in my career.

“What should I study and do next?” I asked them both. The Commodore touched his perfectly coiffed, jet-black hair, and looked me directly in the eyes with an unwavering gaze. “China,” he said, then took another sip of his tea. “We are all going to have to learn how to deal with China politically, economically, and militarily. They are regaining power and will become an unstoppable force, the way they were during Imperial times. The whole world will have to know about how to deal with a rising China, so that is what you should study.”

Until then, I hadn’t given much thought to the country that was home to my mother’s ancestors. I only knew of China as having a crazy big population, dim sum, and those White Rabbit candies I enjoyed scarfing down when visiting my aunt’s house. But that was about it. In the mid 1990s, most Americans were still talking about the rise of Japan as if it were a bogeyman whose business acumen would threaten the American way of life. Hollywood and the business papers presented Americans with a new warning—whether a book hitting the shelves, movies a la Sean Connery and Wesley Snipe’s Rising Sun, or a red-in-the-face pundit—cautioning Americans that they might soon be slaving away for Japanese companies. Many feared the rise of a nation America had so decisively defeated at the end of World War II, a mere five decades before. Few predicted that Japan would soon embark on a multi-decade phase of sluggish growth, losing prestige in international affairs.

By contrast, whenever anyone thought of China, they thought of ping pong diplomacy, hunger, Mao Zedong, the disastrous Cultural Revolution, and the more recent Tiananmen Square Incident of 1989, in which hundreds of protesting students and military soldiers alike were killed in pitched battles on June 4th. Americans hardly thought of the Middle Kingdom as an up-and-coming nation, ready to compete for hegemony in the Asia-Pacific region, let alone in the rest of the world.

This disregard of China was not unique to the American public. Not until President Bill Clinton’s second term—five years into his presidency—did Clinton finally make an official trip to China in 1998, visiting from June 24 to July 3. When hosted at Peking University, China’s most famous institution of higher learning, Clinton chastised China’s leadership for a lack of democracy in the country. Aside from insulting his hosts—a common, if misguided, strategy adopted by American politicians when traveling abroad—Clinton’s speech neither mentioned the South China Sea nor China’s relations with Southeast Asian countries like the Philippines and Indonesia. Instead, the American president focused on the Korean Peninsula and on Indian-Pakistani relations, given that the latter two countries seemed to be on the brink of war. On May 28, barely one month before Clinton’s visit, Pakistan had launched Chagai-I, five simultaneous underground nuclear tests in the Ras Koh Hills of Balochistan Province’s Chagai District. Atop escalating tensions, Pakistan’s move struck fear throughout the world that India would seek military retaliation to counteract Pakistan’s armament.i

Listening to the Commodore, I was struck by the weight of his forecasts, particularly regarding the potential for conflict in the strategically invaluable South China Sea. If America’s leaders were not even considering China and its role in regional waters—an expanse of vital importance to China’s neighbors—I had better travel throughout the region and learn as much as I could about Chinese culture and history. It was then and there that my career as a China observer was decided. After my stint in the Philippines, I lived in South Korea for a while, where I taught English. In South Korea, I also engaged with the political and business elite who echoed Commodore Santos’ views about China’s rise, guiding my career in a similar direction. Gaining further insight into Asia-Pacific dynamics while there, I learned that much of America’s foreign policy establishment was twenty years behind in its understanding of the region, rendering its analyses woefully simplistic and naive.

***

2016

Twenty years later, at the edge of glistening aqua blue waters, I gazed out at the South China Sea, a shimmering 1,351,000 square-mile expanse of the Pacific Ocean. Home to some of the world’s top scuba diving sites, the South China Sea has also been the scene of major disputes, the most bitter battled out between China and the Philippines. But other nations are also party to the bickering: Taiwan, Malaysia, Brunei, Indonesia, and Vietnam all vie against China and the Philippines for access to the sea’s potential crude oil deposits, natural gas, and fishing zones.

Estimates of oil quantities under the South China Sea range from a mere 11 billion barrels to a whopping 213 billion. To put the size of these deposits into perspective, Saudi Arabia has confirmed reserves of 268 billion barrels, Iraq has 144 billion. Yet most of the South China Sea’s potential oil is buried so deep under the ocean that even the largest oil giants like Exxon-Mobil and PetroChina still lack the necessary technology to bring this black gold to the surface. Furthermore, while involved countries certainly seek control over these potential oil fields, oil is currently neither the primary contested goal nor the biggest cause of regional friction.ii

Skirmishes over control of the South China Sea essentially boil down to interregional competition for the creation of buffer zones in case of war, and exertion of power over shipping zones. And these competing interests are indeed well founded. Over $5 trillion USD worth of global trade—or one-third of total global shipping—flows through the South China Sea every year. In times of war, anyone controlling these shipping lanes has the power to enact a trade blockade, swiftly starving enemies into submission. Currently, China seems most intent on controlling the shipping lanes, dedicating more efforts to asserting authority than any other nation.

Over the past decade, China’s primary medium for controlling the sea has been its bolstering of the People’s Liberation Army Navy (PLAN). Realizing that domination of the sea was critical to increasing China’s regional power overall, President Xi Jinping accelerated the country’s naval expansion in earnest after assuming power in 2012. Dovetailed with the president’s anti-corruption crackdown, China’s naval expansion has been a clear priority. Arresting more senior army officers for corruption than naval ones, Xi has also installed more senior naval officers that are loyal to him, confirming the Navy’s position as China’s premier fighting power. In its expansion, PLAN further demonstrated the nation’s prowess when it elected to build its first domestically built aircraft carrier over similar models from abroad, launching the Type 001A Shandong on April 26, 2017.iii

Intraregional military attacks between Chinese Coast Guard ships and fishing trawlers of different nations have been fairly minor, albeit regular. Yet the risk of military engagement continues to rise as both China and America become more aggressive in asserting their control of the area. In 2012, for example, China evicted Filipino fishermen trawling near the reclaimed island Scarborough Shoal, drawing heavy protests from Manila, which threatened deployment of more Filipino naval patrols. Nations have also sent military ships to patrol the seas and anchor near reclaimed islands, further increasing tensions. On October 21, 2015, the U.S. destroyer USS Lassen (DDG-82) navigated within 12 nautical miles of the Spratly Island. Less than a year later, on April 22 2016, the Americans sent four A-10 Thunderbolts and two HH-60G Pave Hawks to fly near Scarborough Shoal. In both operations, the U.S. was essentially telling China that neither it nor other nations recognized Chinese sovereignty in these areas. Unbowed to American might, China seized an American underwater drone at the end of 2016.

Amidst this escalating tension, Chinese fighter jets have also been more frequently deployed to intercept American spy planes. On May 17, 2017, two Chinese Sukhoi Su-30 jets intercepted a U.S. WC-135 spy plane, closing to within a 150 feet (45 m) radius. The U.S. immediately lodged protests complaining that China’s fighter jets flew perilously close to the American plane.iv

Competition for control of specific island chains, such as the Spratly and Paracel Islands, certainly accounts for much of the escalating tensions. Yet the chief cause for heated hostility lies in nations’ dredging of the sea to build reclaimed islands like Scarborough Shoal. Adopting a methodical approach, China has outpaced its competition, building reclaimed islands greater in size and number than any other regional player. Having already built seven artificial islands, China has further installed airfields, ports, and lighthouses on the reclaimed landmasses. To put these figures into perspective, Vietnam, Malaysia, the Philippines and Taiwan have reclaimed about 100 acres in the past 45 years, combined. China, on the other hand, has reclaimed a total of 3,000 acres in the Spratlys in the past three years alone.v

***

Commodore Santos had shown prescience that day in the Manila Hotel. Twenty years after his prophecy, China’s unprecedented rise now sees the nation flexing its muscles to neighbors, particularly in its growing control of the South China Sea. Exacerbated by the proximity of China’s seven reclaimed islands, neighbors worry these might readily be converted to military bases were war to break out. The disputed Scarborough Shoal, for instance, lies a mere 130 miles from the Philippines, reachable by a swift missile attack.vi

Aggravating regional anxiety in December of 2016, the Asia Maritime Transparency Initiative (AMTI)—part of the Center for Strategic & International Studies (CSIS)—claimed it had satellite imagery of Chinese-installed weapon systems on all seven of its artificial islands. Referencing the pictorial evidence, AMTI further claimed that China has installed antiaircraft weapons, essentially transforming the islands into “unsinkable aircraft carriers.”vii

The sheer speed and magnitude of China’s oceanic expansion produces mounting fear throughout the region. Asserting that its development is defensive in nature, China pooh-poohs the expressed concerns of neighboring countries, reminding them that China is neither alone in reclaiming islands nor in bolstering its naval capabilities. Yet no other nation has been as systematic in its buildup of reclaimed islands. Regional neighbors seem almost haphazard in their planning. Why have they not put up more of a resistance, and why has China’s expansion skyrocketed so suddenly?

Previously, many nations looked to America for support, granted a bulwark against Chinese expansion by U.S. policies under Presidents Bill Clinton and George W. Bush. But this reliability began to change under President Barack Obama, as China seemed to view the U.S. as a pushover during his presidency. Apart from deploying 1,250 marines in Darwin, Australia—thousands of miles away from the main scene of tensions in the South China Sea—President Obama merely issued a few words of warning to counteract China’s efforts. The president’s Pivot to Asia seemed more like window dressing than an initiative with any teeth. In an opportune climate, China sped up construction of the reclaimed islands. They felt it best to move in swiftly lest a more rigid and hawkish president—as Hillary Clinton might have been—crack down on the region soon.

Fortunately for China, President Donald Trump has sought to forge strong economic relations with China, taking a low-key approach to battling China in general and in the South China Sea dispute. Chiefly seeking to extract better business deals with China, such as resuming American beef imports into the country after fears of mad cow disease halted the influx or lessening restrictions for America’s banks and electric vehicle makers to expand in China, Trump has also de...

Table of contents

• Cover
• Title Page
• Copyright
• Dedication
• Contents
• Chapter 1: China’s Economic Hammer
• Chapter 2: The Hammer and the Carrot
• Chapter 3: America’s Power Vacuum and the New Global Order: One Belt One Road and AIIB
• Chapter 4: Innovation and the State-Owned Sector
• Chapter 5: China’s Outbound Investment: Clash of Cultures
• Chapter 6: Fear, Wellness, and Understanding the Chinese Consumer
• Chapter 7: The New Global Chinatowns: From Ramshackle to Luxurious Enclaves
• Chapter 8: Chinese Tourism: The CMR Chinese Hourglass Shopping Model
• Chapter 9: Conclusion
• Endnotes
• Index