I have been in Shanghai and Beijing for the past four days. Here are some observations.

The Economy—It is clearly stronger than the US and Europe but there are dark clouds on the horizon. The 8.5% GNP growth was the result of large government infrastructure spending (accounting for 7% of the GNP rise) and consumer spending (4% GNP rise) but offset by a drop in exports (3.5% GNP decline). The economy is strong in the tier one urban areas like Bejing and Shanghai. The high end wage earners are doing well, but the rich poor gap is growing. The southern and western regions are really challenged. Some of the manufacturing has gone and will not return as they have relocated to lower wage sites such as Vietnam. There is real doubt about vitality of consumer spending because of higher unemployment. 22 million migrant workers from rural areas lost manufacturing jobs by the end of last year, as did 15 million factory workers. Eight and a half million students are unemployed after graduating college or high school. Several big companies have sliced compensation by 10% or more, including US multinationals such as Caterpillar. Chinese consumers are nervous about the future, especially people outside the big cities.

The Media—To give you a sense of scale: there are 380 million Chinese online. Hence, mainstream media is in decline, especially newspapers. Very few of the younger set read newspapers, whether in digital or in print form. Magazines are faring better but do not (yet) have a good approach to digital. The Government ban on global social media such as Twitter, Facebook and YouTube has allowed Chinese alternatives to thrive. Key brands include Weibo, the Chinese Twitter; Kaixin and Renren, the Chinese Facebook, Youku; and Tudou, the Chinese YouTube. Most of our staff rely on news aggregators from Sohu, Sina and NetEase who put everything they can on front page which makes it hugely crowded. Advertisers tend to buy banner ads by the day not on CPM or click through for approximately $15,000 per day akin to a billboard. Bulletin board services remain a vital avenue for conversations. Company PR executives remain very nervous about participating in social media conversations, believing the risk exceeds the reward. There is some bad behavior by employees of communications firms who go into social media forums and tout their clients’ products without providing transparency on source.

On-Line Promotion—One of the most successful campaigns in recent months has been the Battle of the Bands by PepsiCo (global Edelman client)-- a mega reality show and its inviting all Chinese “underground” rock bands to debut their own art, cut a record, get on a soda can, much like American Idol. It is crowd-sourcing with people selecting the winners through voting at its very best.

Cause Related Marketing—PepsiCo is funding the drilling of wells in water-starved Western China. PepsiCo told me that 68% of Chinese consumers prefer brands that are associated with a social purpose.

Shanghai as Service Capital—The city seeks to attract investment in trading, tourism, creative industries and sports. Trade enables development of finance, insurance and shipping, plus professional services (accounting, law). Mayor Han said the city is phasing out large polluting industry. Language skills, legal and regulatory clarity and strong capital markets are key to success, said Stephen Green, chairman of HSBC, so that Shanghai can become a networked financial center comparable to London or New York.

Financial Market Still In Development—Venture capital investment was cut by two thirds in 2009, down to $684 million. American and British private equity firms are here in force, seeking to fill this gap. Jim Turley of Ernst & Young released a study of Chinese executives, in which 67% of entrepreneurs said they were seeking opportunities at present while only 19% of established corporation executives said they were seeking opportunities to expand.

I will post from Tokyo and Seoul later this week. I attach photos from our Beijing office, first of the CCTV tower then of the burned out Mandarin Oriental Hotel that was torched in February from an unfortunate fireworks accident.