Sunday, July 21, 2024

‘The magic of China’: still lots for foreign firms, top business leader says

Must read

Joerg Wuttke is currently president emeritus of the European Union Chamber of Commerce in China after chairing both it and the German Chamber of Commerce for years. For other interviews in the Open Questions series, click here.

In the past four decades, China came out of nowhere to become the world’s second-largest economy. As a foreigner who has lived in the country for more than three decades, what has been the biggest change to you, and which officials have impressed you most?

I had the privilege of being here for the first time in 1982 when China was just about opening up. China was very poor then, but it had visionary leaders who wanted to break with the past. My admiration belongs primarily to Deng Xiaoping who made the transition and learned from abroad, which started with learning from Hong Kong, with the spillover into Shenzhen, Guangdong and scaling up in the country.

It is very important that leaders can facilitate change in a language that people not only understand but also put into action. Deng took a journey to the south in 1992 to get the country out of the woods of June 1989. He also had someone who actually facilitated the change.

The other man I admire nearly as much as Deng Xiaoping is [former] prime minister Zhu Rongji, who was very unusual in his wit, criticism and dynamics. China’s trade minister, Wang Wentao, is very open-minded and very smart in defending the country’s positions, while being able to understand concerns of foreign business.

The most important visual change is that China was trying to learn from the West how to build cars. In a way, it never really succeeded, though it is the biggest market. Now China has unlearned how to build cars and developed electric vehicles. It has taught us a lesson on how to build mobile phones on wheels. That is the magic of China.

For you, as one of the most influential business leaders in China, what has been the most difficult moment, and what are you most proud of?

It was in April 2022 when it was clear to me zero-Covid was not going to be good for the economy, nor the country. I wrote a confidential letter to the State Council, which was then leaked and caused a huge discussion that put me on the spot. Being someone trying to bring nuances to the policy and an outspoken advocate of a change that was not supported by the Politburo – that was a very difficult moment for me.

I have always tried to steer discussions, as it is the duty of the European chamber. We are guests here but with stakes and interests in this country. We bring ideas to the table. If they are rejected, we have to live with that.

The proudest moment for me as a community leader was in 2001 when China joined the World Trade Organization (WTO). The European chamber was founded during the period of time [in 2000] and we were deeply embedded in the discussion on what Europe should negotiate with China. We wanted China to succeed, as there was a lot of pressure on premier Zhu not to join the WTO. Unlike today, it was a very open discussion in China at that time.

How do you see the rising nationalism in China in recent years? What would be the danger if there is less tolerance for different voices?

When you look into economic history – the strong growth in imperial Germany between 1870 and 1910, Japan until 1990, and the fast rise of the economies of Taiwan and South Korea in the ’80s and ’90s – those periods changed the psychology of people, making them feel that the sky’s the limit. It showed, in their patriotism, a justified pride of what they had achieved. Yet, those economic star performers also belittled other countries because they saw through the prism of a zero-sum game. Japan in the 1980s looked like it would be rolling over everybody else, but then the economic growth was flat for decades to come.

Joerg Wuttke in Hong Kong in 2023. Photo: Jonathan Wong

China is running the same risk believing that she is unique. That might be the wrong kind of nationalism.

I’ve witnessed, myself, the rise of China over the last 40 years as an incredible success story, but I also saw the challenges arising in all those economies after long periods of strong industrialisation and urbanisation. You run the risk of misjudging yourself. You might call it hubris.

Facing the heightened US tech containment, China has taken defensive moves and focused on national security. Will confrontations escalate and hit economic growth?

It takes two to tango. China started pushing. The US played American football, fighting for every yard and pushing back.

China is overemphasising safety and security, which unleashes forces on the other side doing exactly the same.

On a totally different level, [Vladimir] Putin and Russia have been worried about [the North Atlantic Treaty Organisation] encroaching on Russia. And by attacking Ukraine, the Russian leadership managed to do exactly that. Now Finland and Sweden are members of Nato, and eventually Ukraine might end up as a Nato partner. So, in a way, sometimes by trying to avoid things, you actually might aggravate developments you tried to contain.

It is not necessarily the case that China and the US are falling out. There is still room to navigate this. But it takes leadership to see that every assertive action on one side causes a counter-reaction.

We are not at a dead end yet. But we are in a situation where parties are overemphasising the defensive game, in which everything has to emphasise security. This could stifle economic development.

Are Western countries deeply worried that China’s rise, or the Global South, would challenge their long-term dominance in the global order?

If a shift takes place in the world, economically, but also by demographics like the rise of India and China, it always changes the whole setting. To assume that we can go back to the 1950s and ’60s, in having the West – particularly the United States – controlling everything, is not realistic.

The rise of China or India will clearly change the dynamics.

Unlike the rise of Korea or Japan, China is not under the influence of the US. China has chosen a political system that has a built-in rivalry. As a German, I have read Karl Marx. There is a duel between capitalism and communism, and Marx’s dialectics predicts that communism will eventually prevail over capitalism.

So, the Chinese political class is certain that, eventually, their system is going to prevail over the Western system.

It requires strong visionary leadership to navigate those ideological cliffs. Deng Xiaoping knew how to communicate with other countries while refraining from emphasising ideological supremacy.

Does it also matter how to tell a good China story?

My home country developed out of very difficult circumstances. Germany was never a unified country until 1871. The unification unleashed incredible intellectual and economic forces and turned Germany into an economic superpower in the late 19th and early 20th centuries.

Similarities don’t have to match totally. There is no comparison between the leadership of China and the imperial emperor Wilhelm of that time, but it indicates the trend line that you have to watch.

Germans 120 years ago felt that “someone’s blocking our rightful place in the sun”, referring to the dominant British Empire. After 1871, chancellor [Otto von] Bismarck showed great skills and leadership to accommodate neighbouring countries to facilitate the economic and societal transition, to make it as smooth as possible and not be antagonistic. In our case, it ended in disaster – the first world war. That doesn’t have to be replicated. History doesn’t repeat itself, but it often rhymes, as Mark Twain said.

Despite growing engagement between Beijing and Brussels, Beijing and Washington, differences still weigh heavily on relations. Is confrontation unavoidable, over the long run, between China and the West?

The view from Washington on China is all about security. But in Berlin or Brussels, it is all about the economy, though it has changed because of China’s reluctance to criticise Russia for its invasion into Ukraine.

The challenge in Europe-China relations will be about China’s ability to address trade flows, to cut the incredible domestic overcapacities, a willingness to reconsider the substitution of imports from Europe, and the political will to really grant full market access to European business.

It is also about the perception in Europe that China is taking away jobs from European companies, outbidding them often fair and square, yet at times due to outsized subsidies winning bids on an uneven level field.

The EU-China relationship will be focusing on jobs: does China create jobs or kill jobs in Europe? This will drive our democratic system in Europe in its search for an answer on “how to respond to China”.

We could do so much more with the investment of Europe in China

At this stage, China does not create enough jobs in Europe. Its market is really not yet matching the openness of our home market. The European chamber has a position paper with more than 1,000 items of unresolved issues in China, and the number is growing instead of shrinking.

EU exports to China are going down from an already very small basis. The EU’s exports to China in 2022 were just 23 per cent more than China’s into Switzerland. So, is the Chinese market really only 23 per cent bigger than the Swiss market?

EU business in China is still not investing enough, given this market’s potential. We could do so much more with the investment of Europe in China. Real annual EU companies’ investment is still less than US$10 billion per year, which is pretty much what EU companies invest in Texas annually.

We get criticised back home for being overexposed to China and overdependent on China. My argument is always that we are under-represented in the Chinese economy, and we want China to open up more so we can export more to this market and create more jobs back home in Europe.

What is your assessment on overcapacity in China? Is it a severe issue?

It is, unfortunately, a recurring topic. The European chamber launched reports on overcapacity in 2009 and 2016. The chamber published a study “Made in China 2025” in March 2017, indicating that planning in China too often leads to overcapacity.

It is a systemic problem in China. At the core of the overcapacity problem is that nobody leaves the market. Everybody hangs in there, fighting for market share, dropping prices and trying to be more efficient.

In Western markets, companies go bankrupt as an economic response to overcapacity. In China, companies do not go bankrupt often enough, unless they are in private ownership. China has at least 150,000 [state-owned enterprises] – none of them go bankrupt easily, because they’re state-protected.

China produces too much of everything. It is a problem for the West as it struggles to compete against often-subsidised companies that are surviving, rather, by fighting for market shares while dropping prices instead of improving competitiveness.

China does not really have a demand problem, they have a supply issue

The overcapacity is actually a much bigger problem for China herself than its trading partners, as domestic companies produce plenty of products but many do not make money. It forces them to cut costs, possibly cutting corners on, let’s say, environmental protection, and/or sacrificing spending on basic research.

Too many local governments are subsidising and keeping companies afloat. Companies should make their assets sweat, make money and be profitable to pay local taxes and do innovation. But now it is not happening in many places.

Chinese officials know companies have to go bankrupt and cannot subsidise them forever. But they also worry about unemployment, and that is where language and clarity of thought come in. That is where leaders have to communicate with the public clearly: it will be a tough period of time, but we will be better off and we still have a huge potential.

China has to develop areas where there is a high chance of higher employment, such as the service sector. China does not really have a demand problem, they have a supply issue.

Beijing has to find a mechanism to get away from producing too much steel, aluminium, cement, cars and wind turbines, and focus more on healthcare, tourism and logistics. The service sector creates more jobs and does not cause international trade tensions.

Is China facing an unprecedented challenge to lift business confidence?

China is not very different from other economies on the issue, such as Japan and South Korea. Germany had a sentiment challenge after very strong economic growth in the 1950s and ’60s. It is always the situation, after a 30- or 40-year run of robust economic growth, economic growth slows, and subsequently, sentiment turns dark. So, the language from leadership matters to explain the importance of that transition.

It might be very painful, but the transition in other economies has shown it can be handled. Economies bounce back. The United States had major cycles, like in the ’70s, with the Vietnam war and an energy crisis. But 10 years later, the US was the shining example of high technology. The US showcases that, if a country has a system that allows for painful restructuring, a capital market that manages the transition, a leader who explains that transition – as the US had with president [Ronald] Reagan – it is possible to address pessimism in a society.

Foreign businesses in China are not interested in ideology or nice words

The economy is recovering slowly. Foreign investment into China has also slowed, while concerns over tightened national security scrutiny have mounted. Are foreign businesses losing patience with China? If so, who will be the next China?

Foreign businesses in China are not interested in ideology or nice words. They want to see the real market hurdles removed, similar with Chinese companies operating elsewhere in the world.

China can do better. In the real economy, I see a strong desire among the big multinationals to invest more, and particularly in areas where they can benefit from Chinese innovation and engineering skills.

It is just too one-dimensional to see China only as a sales target. It has an incredible engineering base, which you want to tap into to produce competitive global products. China has a lot to offer in innovation.

It is not very strong in basic research, but it is the world champion in development. China has the most demanding and fast-changing customers in the world. If a company wants to be globally competitive, it has to be in what I like to call the “fitness centre China”.

Small- and medium-sized enterprises from Europe are reluctant about investing here. They are concerned about the complexities of dealing with the security law and data-transfer requirements.

There is also the stronger scrutiny that foreign companies face in their own backyards, such as supply-chain laws and the Uygur Act in the US, which leads some companies to think twice about how to engage in this economy. The pressure on companies to invest in China comes from many quarters.

The Chinese population is shrinking and ageing. Energy prices are quite high. Debt levels are worrying. Local governments used to finance themselves partly from land sales, but now the money has to come from somewhere else.

It’s either from private citizens in the form of individual income taxation – which is unpopular anywhere in the world – or it’s generated from business, which already is heavily taxed in China.

We sense that EU companies are not really leaving, but we notice them moving elsewhere in new investments. China has great potential to rediscover a business-friendly language and rejuvenate the animal spirits among Chinese private entrepreneurs. An excessive control mechanism in the economy is not conducive to private entrepreneurship.

You once mentioned there was a declining interest among foreigners in learning Chinese and understanding China, especially among young people. Will the situation continue? And how dangerous would it be?

China has realised it is a danger. President Xi Jinping made a big announcement in San Francisco about inviting 50,000 students from the US to come to China.

Now, it is one thing to say it. The second is to finance it. And the third is to look appealing for students to come over and study Chinese and live in this society.

Students are young people like my own kids, and they want to have free access to Facebook and TikTok in China. Do you want to use a VPN, or live in an environment where you have to watch your words, for example? Maybe kids don’t want that. China has lost its allure to many young people from the West.

And that was aggravated by Covid. We were down to a couple of hundred foreign students in China. But the allure of Western universities’ education is huge. We have had hundreds of thousands of Chinese studying during Covid and after Covid in Western institutions.

For the West, the danger is that we are losing touch with China

The 50,000 goal is a good mechanism. But it involves so much more. I like the Tsinghua Schwarzman scholar programme where I sometimes give lectures. When you see these young people from all over the world coming to Beijing it is heartening to listen to these youngsters who are willing to leave their home country, learn Chinese, and expose themselves to a wonderful new experience. So, it is possible to attract young people to China.

For the West, the danger is that we are losing touch with China, losing the ability to understand and develop an emotional bond with this civilisation. And we would lose the ability to see beyond politics. In many ways, it is cuisine, art and sports that bind people together.

China has a lot to offer but finds it difficult to project it. Other countries seem to be more attractive, and China has to reflect on that.

Joerg Wuttke in Beijing in September 2014. Photo: EPA

In the Ukraine war, is Beijing able to play the role of mediator?

China follows the Western sanctions to a large degree, which is good, but that’s not enough. It has to show a human face – not just by showcasing what they are not doing, meaning compliance with sanctions, but by showcasing humanitarian acts of assistance.

China could step up to the plate when the war grinds to a halt and engage in the reconstruction of Ukraine, assist financially, and offer humanitarian aid to get Ukraine back on its feet. It remains to be seen how much China feels like it can be part of this transition in the future.

Are we going to see a more fragmented world in the coming years?

We should not underestimate the sea change that another Trump administration could bring to the world. Will he get out of all these commitments in Asia that [US President Joe] Biden has established? If Biden continues with a second term, we might see a stronger G7.

The so-called Global South is not an alliance, or even aligned nations. India will not be in the sphere of China, nor will it become an ally of the West. India will be India, and it will be big enough to look after her own interests, which will change the world at a later stage.

China’s overcapacity-prone products will certainly not end up only in Brussels, Berlin or Paris, but all over the world

Southeast Asia will have its own dynamics. It is more dependent on China’s economic performance. A lot of the Global South countries would benefit from the China growth story. But if China’s economy moves from 5 to 3 per cent growth, there will be less demand on commodities, which would have a huge impact on those economies.

China’s overcapacity-prone products will certainly not end up only in Brussels, Berlin or Paris, but all over the world. There will be benefits to some – like Australia, which, for example, does not have a domestic car industry to worry about. But economies like Malaysia, Thailand and Brazil do. Will they openly embrace Chinese cars? I don’t think so.

It will be a more fragmented world, and [Donald] Trump will be the one who might be a catalyst in fragmenting it further.

You will leave China and settle with your family in Washington in July. Before your departure, can you share your outlook on China for the next five to 10 years, and are there any suggestions you would like to offer Chinese officials?

I would say that an educated guess on where China is heading can be found with comparisons to other East Asian economies. China might grow flat for the next 20 years like Japan. But keep in mind that Japan maintained a sizeable and innovative economy while it had virtually a zero-growth pattern.

China could be facing an economic shock, as with what happened in South Korea in 1997. The economic turmoil there led to a reform of the chaebol [family-owned conglomerates], stronger foreign investment and more agile private entrepreneurs.

The real winner in economic comeback stories is South Korea. It has been performing better than other economies after the crisis in 1997.

In the West, we have a much longer history of industrialisation, urbanisation and democratic systems. We are so different that I think drawing inspiration from us would lead to the wrong conclusions.

The inspiration that Beijing can draw is from East Asian economies, but it is up to the leadership in Beijing to decide which way to go.

Latest article