China’s resurgence – the ‘normal new’

By Pedro Nueno and Frank-Jürgen Richter

Business Times, April 15, 2015

President Xi Jinping emphasised at the Boao Forum in March that China was changing and its headlong growth was slowing; its older characteristics were weakening, so more structural reforms were needed.

Some might have felt this to be negative, but we think it is a positive view. He focused mainly on the economy and the environment, and on the former noted that the GDP forecast of 7 per cent was in line with the “new normal” – by which he may be suggesting his nation might be becoming “developed” and so would have lower annual growth. After all, across Europe’s real GDP growth is low (in the UK it’s 2.5 per cent) and in the US it’s 2.4 per cent – far below China’s level. Mr Xi’s message is a subtle way of transforming Premier Li Keqiang’s key phrase of “new normal” which subtly would become the “normal new” viewpoint – which we think is so positive but also different from the past. All must learn this and strive for the future.

President Xi’s views will have consequences for the rest of the world and for the shaping of global trade, if not local economies and how they are made up. Previously strong consumer nations of China’s exports would have to re-establish their own manufacturing capability, lifting their total factor productivity by investing in new capital stock. In China we now find an increasing movement from state-owned to the private sectors, from real estate to production; and these firms are opening up interior cities to new ventures, thus spreading new wealth. One of us recently met about 10 high-level CEOs of very large Chinese companies in different sectors. In general, they projected China in a positive way.

Through its strong powers, the Chinese government has changed the nation vastly over the years. In determining to be the global manufacturing and assembly centre, it increased its need for energy. It undertook huge imports of oil, gas and oil as well as built vast hydro-electricity projects. It also built many fossil-fuelled power stations as well as nuclear ones.

This stimulation across all industrial sectors made it the globe’s greatest polluter – which it has offset by becoming the world’s largest producer of renewable energy through solar and wind energy, with the EU and the US following in turn. Premier Li stressed stronger pollution controls in his speech but we think this must also be pursued in parallel with strong adherence to international standards.

China already mandates that new motor vehicles built in the country as well as imported vehicles conform to the Euro 5 standard (and soon Euro 6, in a few years’ time). It is investing huge sums in new techniques of cleaning exhaust gases from large enterprises, and in creating energy from coal in ways that are cleaner than simply burning in power stations.

Such efforts will help China meet its forthcoming commitments to mitigate climate change.

While China surfs the waves of globalisation, we feel it understands the need to integrate historical Asian authoritarianism with its contemporary need to embrace global capitalism. This is seen clearly in its wish to move to a greater degree of entrepreneurship and private ownership – albeit at a centrally controlled rate. The government applauds middle-class purchasing power and its stimulation of the supply side of the economy as this will stimulate its entrepreneurial spirit and increase employment throughout China.

Financial experts often look at the inward foreign direct investment (FDI) of a nation to assess its well-being. In China’s case, this is rising well, reflecting a long-term relaxation of regulations, and it looks set to enable more FDI. But investment is two-way: inward and outward.

China’s outbound FDI has surged from its low base, according to the OECD. Much initially was promoted by state firms as they looked for new providers of fuels or minerals. Latterly, private Chinese investors have entered the scene to invest in greenfield sites or more usually to create a joint venture (used loosely here, not as a legal term) with an existing foreign national firm. This new wave of investments in New York sees Fosun buying Chase Manhattan Plaza; Greenland bought Atlantic Yard; Zhang Xin bought the General Motors Building; and Alibaba is considering opening a new outlet in the US.

In the automotive sector, Geely bought Volvo in Sweden in 2010 and UK’s The London Black Taxi in 2013, and is now setting up an R&D centre creating 1,000newjobs to develop a new hybrid low-emissions taxi, while Dongfeng invested in Peugeot-Citroen. Up to 2013, Chinese firms had invested in 98 European firms, targeting the UK, France, Germany and Portugal (so far). Generally, Chinese investments have been in ailing firms, thereby boosting local national output from the firms and helping associated up and downstream businesses become more secure, maintaining supply chains and supporting local labour. Now, Chinese firms are bidding directly for new business, such as a new nuclear power station in the UK and high speed rail systems worldwide. China has confidence now.

We must remember that China has a long history of rebirth followed by social agitation. For instance, commercial development in the early 20th century was followed by the 1911 Revolution when the new Republic of China was assailed by demands for restructuring which may presage “echoes” of future stress prevailing today. Yet the world is now a globalised place; Chinese manufacturing and the country’s many entrepreneurs and innovators have benefited from globalisation, and “the butterfly in China does indeed rock the boats on distant waters”.

Mr Nueno is president of CEIBS and professor at IESE Business School. Mr Richter is founder and chairman of Horasis, a global visions community.