Hello, welcome to visit Shanghai Forum
Fang Xinghai:
Dear ladies and gentlemen, good morning,welcome to Shanghai.
My topic today is a little bit different fromthe introduction just now, but almost the same in terms of the content. Mytopic today is The Wisdom of China Based on an International View. Afterthe international financial crisis in 2008, there have been great changes inthe world except one thing remaining unchanged--globalization, which has notslowed down because of the international crisis. What measures should Chinatake in the context of globalization? If we want to answer this question, wemust be fully aware of our strength at first.
If we talk about China from an internationalperspective, we will find out a lot of problems. If we focus on the issue ofChina, we will find endless topics to talk about. Recently, there are all kindsof manifestations of growth declines in our economy. For example, the centralfiscal revenue from January to April fell for the first time over the years. InMay, the manufacturing index published by HSBC just recently also declined forthe first time.
Recently, I have been seconded to work inBeijing. Everything was good except one thing--air pollution which I was veryworried about. It seems that many foreign friends here might have the sameworry as me especially when you go to Beijing in winter. There are also someother issues in China. For example, some places are to establish some bigprojects in environmental protection because of the recent reports. There wouldbe some marches or objections in the locality. Such a big country always has alot of problems. But if we focus on the chance and focus on those we can do asa big country, we would find out that we can do a lot of things that other countiesmay take pains to do or can not do. So today I want to focus on my topic--theopportunities of China from the international perspective and talk about somethings that can be done by China currently, but can not be easily done or cannot be done by other countries at all. There are eight points in total: thefirst four points are related to the open-door policy of China.
Firstly, now China is in a very favorablesituation of the open-door policy. Almost all the industries that we cansubdivide, for example, automobile, chemical, elevators, financial service andso on, rank first or second in the world now from the perspective ofincremental market. The result indicates that any large multinationalenterprise, no matter in manufacturing sector or service sector, can not giveup the Chinese market. If it loses in the Chinese market, then it will bedifficult to gain an edge in the global market. Such a privileged positionallows China to attract the world's most competitive companies into Chinesemarket. If multinational enterprises are to settle in China and want to win inthe Chinese market, they must bring their new technologies, new research anddevelopment strength and best manufacturing technology to China. Otherwise, itwill be difficult for them to win in the Chinese market. This is a very bigchange. Several years ago, second-rate technology might gain a good market inChina. But nowadays it is very difficult. A best example for this is GeneralMotors(GM) and we know the best car of GM. When I was studying and working inAmerica, people knew Cadillac, which was not so good then, but was liked by theyoung people of America. Japanese cars were more popular then. If Cadillac areto compete with Mercedes-Benz, BMW and Porsche in China's luxury car market, itmust bring its latest research and development technology to Shanghai. Now bothits headquarter and production are in Shanghai. In this way, it can respondquickly to the need of the local market, design the most suitable car for thelocal market and produce more competitive cars at a lower cost. So I believesuch trend will also occur in other industries. This is a great advantage ofChina. That's to say, some domestic enterprises can depend on the open-doorpolicy which prompts leading foreign enterprises to bring their latesttechnologies to China through the competitive environment of the largestdomestic market. I have many examples of this kind, but I will not mention themone by one for the sake of time.
Secondly, there are some things that Chinacan do, but other countries can not do easily. Our enterprises have many newadvantages when they go overseas to participate in mergers and acquisitions,including building joint ventures with other enterprises. These advantagesdon't exist in other developing countries and they are reflected in threeaspects: firstly, China is a very big market so that many overseas companiesare willing to be merged by Chinese enterprises or to form a good strategiccooperation relationship with Chinese enterprises. Then these overseasenterprises can gain a bigger share in the Chinese market and take the moneyearned in the Chinese market share as a feedback of their competitiveness inthe world and enhance their competitiveness in the global market. A bestexample for this is Volvo which is merged by Geely, a small automobileenterprise of China. Then why is Volvo willing to be merged by Geely? I thinkthe reason for this may be that Geely is an automobile enterprise of China andVolvo may win a big promotion in its market share of China after being mergedby Geely. The money earned in China helps Volvo to compete with BMW in theglobal market. If Geely was an automobile company of other developingcountries, can you imagine "would Volvo sell itself to Geely?" Ithink the answer is "No".
There is another big advantage in China--thecapital market. Although our capital market itself is not very developed, wehave very strong financial strength and our overseas mergers and acquisitionshave gain strong support in terms of capital amount from the domestic bank, ifwe dare not say in terms of service. This is also a very big advantage ofChina.
There is another advantage that many domesticenterprises have developed some technologies which is suitable for the domesticmarket of China, a developing country, so that they will discover theirtechnologies in China can also be applied to other developing countries whenthey go there for mergers and acquisition. This will help them win the mergersand acquisitions overseas as a result. Take an example of the state grid. Inrecent five to six years, State Grid Corporation has conducted a dozen oflarge-scale mergers and acquisitions in Philippines, Australia, Portugal,Brazil and so on. There is a great advantage for it. That's to say, thetechnology of State Grid Corporation is very suitable for the needs of suchdeveloping countries as Philippines and Brazil.
Thirdly, nowadays there is a very good andgreat chance for service sector, financial service, education, medicaltreatment and public health, service in consumption and communication inChinese market. I f we open to the outside world, I believe the bestenterprises in service sector overseas will come to China. Recently, primeminister Li Keqiang has also said that our country has developed into a stagecalled "middle income" and there a rapid growth in the needs forservice sector. If we seize the opportunity and open wider in terms of servicesector, I believe we will attract excellent overseas service companies to Chinafor business conduction. We should improve the quality of service sectorrapidly. The promotion of service sector quality is different from that ofmanufacturing which would be improved if you introduce some equipments andemploy several designers. However, if we want to improve the quality of servicesector, we must introduce enterprises of profound operation experience, notjust several personnels.
Fourthly, what we can do in respect to theopen-door policy is the internationalization of Renminbi which I am veryconcerned about. Just now Mr. Robert Zoellick has said that China canparticipate in the formation process of global monetary system and the newfinancial system. When we talk about the internationalization of currency, Ibelieve other countries are also willing to make their own currency become theinternational currency. But I feel that now only Renminbi is a potentialinternational currency. Other countries say that they want their currencies tobe the international currencies. Is it possible? Yen has tried, but failed.Ruble of Russia also wishes to become an international currency, but has itsucceeded? If our country has a further consensus and we focus on theconvertibility of Renminbi capital, in the near future, Renminbi, in a decadeor so, is very likely to become at least a very important trading currency andthen gradually develop into an investment currency in capital market andfinally a reserve currency. This is also a very good opportunity for ourcountry. From China, I have also mentioned something and now I want to mentionfour points that our country can do, but other countries do not seem to be ableto do:
Firstly, our central government can issuelong-term and a considerable amount of long-term debt. For example, we canissue a lot of 30-year treasury debt. To the end of last year, China's ratio oftreasury debt to GDP is around 14%, which is very low in the world. Not all thecountries can issue treasury debt as they like and many European countries nowcan not issue treasury debt. But China has a very large potential in issuinglong-term treasury debt. Moreover, most of the long-term treasury debt issnapped up by domestic investors for the reason that we have enough savings andwe don't need foreign investors to buy our treasury debt. If these long-termtreasury debt is issued, it will bring a very good function. In the short run,it can stimulate the domestic demand to rise promptly on the ground that thecapital collected from these treasury debt can be used in the construction of somelarge-scale infrastructure and many infrastructure construction which shouldhave been funded by the local government can be borne by the centralgovernment. We can also promote our social security system, medical insuranceand endowment insurance system and we can invest more in education. This is thefunction to short-term macro-needs.
It also has an immeasurable function tofinancial market. Our country has a lot of financial market savings, but fewinvestable varieties. If the interest rate of these long-term treasury debtissued reaches 5%, I believe many ordinary people will be willing to invest andthen the risk is gone. This can also help to perfect the financial market as awhole and reduce the financial risk. This can also change the problems that nowa lot of money is invested in shadow banks and other kinds of irregularfinancial products.
Secondly, if our simplified one-childpopulation policy has changed, it will produce considerable benefits in China.There is one point of China different from many other countries which mayowning to the years of cultural traditions of our ancestors that Chinese peoplehave a strong concept of kids and family. The difference can be seen especiallyin the group of high income or middle income, unlike those in other countrieswho are unwilling to give birth to children. I used to work at Shanghai StockExchange Center where I had a very capable female colleague who had beenpromoted to the department director of the center at the age of slightly morethan 30. In order to give birth to her second child, she quitted her job andchose to stay at home. You see this has caused a loss of human resources if ourpolicy was not so simple. Certainly one-child policy is necessary in China, butif the policy was not so simple, I think this female colleague wouldn't havehad to quit her job and she could work when waiting for the coming of thesecond child and this kind of loss wouldn't have happened. If our birth ratepromotes, especially in the cities, the domestic demand is about to risepromptly. The needs brought about by the kids are very strong. In addition, weChinese attach great importance to education and these children will become thestimulation of economic growth after a dozen years or two decades. I hope oursenior policymakers will make an appropriate decision as soon as possible.
Thirdly, we have a large amount of privatefund waiting anxiously for investing in industries where private investment isforbidden. My hometown is in Wenzhou, which is one of the earliest regions ofthe reform and opening-up policy. There are many small and medium-sizedenterprises there which started their business in the late 1970's or in theearly 1980's and accumulated some funds. Later on, due to a lot of reasons,these funds are not allowed to enter some industries, so "What can thesefunds do?" To invest in real estate property? To invest in speculationcommodities? Or to invest in loan sharking? This results in a lot of financialrisks in Wenzhou now. In fact, they have a strong will to enter the financialfield, education and health field, and information service field. If thesefields were open to enterprises, there wouldn't have been so many problems now.If these enterprises are allowed to enter these financial fields, it will helpthem to upgrade their industry in manufacturing sector and will also preventthem from investing blindly in some unfamiliar fields, such as solar energy,bio-technology and they won't suffer from failure in investment.
Fourthly, what we talk most is theurbanization in China which is confronted with a lot of serious problems.Certainly, this is not to artificially help the growth of urbanization, but tobuild a lot of buildings for urbanization. If we remove the population policyand registered residence policy which are the impediment in the normal flow ofpopulation and economic development, there will be a more rapid propulsion ofurbanization that is also suitable for the needs of economic development. Thiswill result in a huge impetus to our domestic demand.
The eight points above are what we can doright now and can not be done easily by other countries. When it comes to theopportunity of China, we should take a step back to see "what is the mostpowerful point of China's competitiveness in essence?" There are twopoints of China which are different from other countries:
Firstly, China has a population of 1.3billion people who are willing to work hard if you give them some wage which isnot so high. This can not be easily found in other countries. In 1990's, Iworked for 5 years in the World Bank when Robert Zoellick was the president ofthe bank. I have also been to a lot of developing countries. I believe theredoes not exist a developing country which has such a vast territory as Chinaand has such a labor market as China where everyone is hard-working. This isthe fundamental competitive advantage of China. This advantage will beconducive to the competitiveness of China's export in the world in spite of therising cost, rising labor cost and so on. Certainly the data have also provedthis point though there may be some small mistakes in the data. However, I haveheard that the export of China from January to April grew by about 10% afterconversion.
Secondly, we are inherently very competitive.Our government is a government which is very concerned about economicdevelopment, no matter from the central government to the local government orthe government of the district or county level. Our government is also agovernment which is very glad to help enterprises to develop well. I have alsobeen a lot of places in the world and I haven't met a country which is moreconcerned about the economic development. This is also an advantage of us.
Of course, we have talked about so manyadvantages about China. Many friends would say there are still a lot of risksin China now. If there are so many risks, will China be able to display itsadvantage and realize the eight desirable things? Currently, President Xi hastaught us to keep the bottom line thinking and we should have a thoroughunderstanding of the problem as well as the risks. Have I talked about too manyadvantages to the neglect of risks? No, I do have taken account of the risks.
Economically, I agree to the two main risksin China now that you have talked about a lot: one is the risk of financingplatform of local government; the other is the risk of real estate market. ButI feel that we can well manage these two risks on the ground that there is landor property which can be used as the guaranty for these loans or otherfinancings in financing platform and real estate if we think meditatively. Ifwe are to deal with the risks in such a financing structure, the key point istime-for-space. That's to say, at first, you should slow down the new loans andnew financing and can not make them swell like previous years. Then you shouldnot force your company to go bankruptcy because you can't pay off the loans ofone company. What you should do is time-for-space or to delay through anextension of time or other financing options. The economic growth of China isabove 7%. Several years later, with the advancement of urbanization, theselands, real estates and other assets will become valuable one day. When I cameback from abroad in 1998, I worked in Construction Bank and the first thing Idid was to participate in the establishment of credit assets managementcompany. The situation then was worse than now and the bad assets ratio wasmore than 30%. The approach we adopted then was time-for-space in the contextof rapid growth. To the year of 2003, these seemingly worthless assets allbecame valuable later. Therefore, this is a great advantage for China indealing with crisis. That's to say, we deal with crisis in the process ofeconomic growth. Moreover, there is another great advantage for China inhandling crisis. We have a large amount of state-owned assets which can be usedin dealing with the crisis. This is a buffer for us and not owned by othercountries. So I believe if we have a thorough understanding of these risks andfind out a solution, we will discover that China has a solution to deal withthe crisis. The key point is that we should not stop only to deal with thecrisis and neglect the economic development. If so, we all will be done and therewill appear a lot of problems. We need continuous development and we can dealwith these risks in development.
You may have a question that the eight pointsI have talked about just now are closely related to the reform and opening-uppolicy. Then many of you would have a doubt "will reform and opening-uppolicy be further advanced?" I myself have full confidence at this point.I have talked about that Chinese government has been taking the economicdevelopment as its core task and now the economic growth is on the decline. Asa result, our government must advance the reform and opening-up policy andaccelerate the pace of reform. We can draw a conclusion that China would speedup the pace of reform and opening-up if economic development slowed down after lookingback to the 30-year history of reform and opening-up in China. So you shouldnot have any worry that China will slow down its pace of reform and policy inthe current context of declining economic growth due to the vested interests.
To sum up, there are many problems in China,but we have more opportunities. As long as we have a thorough understanding ofthese risks, take clear measures and make good arrangements for these risks, wecan stride forward to promote reform and opening-up and to stimulate economicdevelopment, and then to deal with these risks in development so that oureconomy will step into a new stage.
