The inaugural ‘Summer Davos’ held last month in China’s attractive north-eastern coastal city of Dalian clearly reflected not only China’s growing integration into the global economy but also the challenges it faces. While the wide boulevards and modern architecture of this city of six million people, known as the pearl of the north, were completely new to most of the 2000 delegates or ‘New Champions’ attending this new event by the World Economic Forum (WEF), many issues were quite familiar but with new insights.
In one spirited debate on soft power, Tom Friedman, New York Times columnist and author of The World is Flat, clashed with Chinese panellists over China’s role as a global power in the post Cold War era. A Chinese official said: “We don’t believe external forces can change a country so in international relations we advocate equality.”
To this Mr Friedman stressed the need for the forthright exercise of power by the big global powerhouses, such as China. Emphasising the dangers of China’s so-called non-interference policy, he noted stridently: “If you don’t play you will pay.”
Among more than 60 separate sessions the New Champions provided a host of insights, especially into China’s financial outlook. Examining the outlook for China’s capital markets, Shang Fulin, chairman of the China Securities Regulatory Commission, described Beijing’s landmark announcement in August to allow individual investors to begin directly trading in Hong Kong listed shares as “a trial, an experiment”.
Risk controls
Mr Shang cautioned that much work remains to be done in upgrading mainland capital markets. “The foundation of the market is weak, the risk controls are not there yet,” Mr Shang noted, adding that the top priorities are improving the legal environment, which in part means stiffening punishments for those who violate the law, and boosting investor education.
Fred Zuliu Hu, managing director of Goldman Sachs (Asia), Hong Kong, was bullish but aware of market needs. “Chinese corporate profitability is at record highs, so investor confidence has come back. Liquidity has been abundant too, real interest rates are negative.
“In the future, China will need a more robust domestic venture capital and private equity industry to help smaller local companies obtain capital. Banks will also be key in providing financing.
“When it comes to changing the growth model from capital intensive to more innovative growth, the capital markets will play a big role in the process.”
On the outlook for domestic brokerages, Fang Xinghai, deputy director-general of Shanghai’s Office for Financial Services and one of WEF’s young global leaders, said he hoped more securities firms would list publicly and he believed the competitiveness of local brokers could be boosted by granting full licences to more foreign investment banks.
Chinese regulations
In examining China’s investment landscape, one private equity investor noted: “China has entered a golden era of wealth creation for the next 50 years.” But while significant long-term opportunities were noted, others mentioned the difficulties in manoeuvring through the regulatory environment and also the problems associated with exiting an investment.
Looking at the overall policy environment, Fan Gang, director of the National Economic Research Institute, explained: “Policy making is much more complicated than before; clearly, with a GDP [gross domestic product] per capita higher than $2000, the Chinese economy is more complex than when GDP per capita was only $100 to $200. Policy goals have diversified from the pure economic to include environmental and social objectives; a large part of the population remains impoverished while income disparities are widening.”
Veteran international banker William Rhodes, chairman of Citi, noted that financial sector reforms that have opened up the banking sector to foreign participation have been enormously successful so far but more needs to be done. “The country is still over-reliant on the banking system, more needs to be done to develop the securities market and a local bond market.”
With the critical 17th National Congress of the Communist Party of China taking place this month and the not-unrelated recent resignation of the finance minister, Jin Renqing, there were plenty of concerns over continuity in the reform process. But while the Congress is likely to bring some new messages, Zhang Xiaoqiang, vice-chairman of the National Development and Reform Commission, was reassuring as to the country’s direction as well as acknowledging that China is entering a new phase. He said: “China’s leadership will continue the policy of reform and opening up.”
He emphasised, however, that China must pursue growth through innovation, rather than relying on cheap labour to fuel development. China, he said, must stress education, science and the need to increase technological expertise.
As Chinese premier Wen Jiabao pointed out in a keynote address at the forum, political reform must go hand in hand with economic and social progress. Delegates also stressed that the need for greater transparency and pluralism was putting increasing pressure on government leaders and policy-makers at the municipal and provincial levels in China, particularly as the domestic competition among cities and provinces increases and Chinese cities and provinces also compete more for investments with overseas rivals. This is said to require a different approach to governance than might have been typical in the past.
Services sector
The structure of the economy is in transition as China seeks to move away from its manufacturing roots and boost its services sector, which accounts for less than 45% of GDP compared with the global average of 50%. Dr Liu Jiren, chairman and CEO of a dynamic Shenyang-based software and services company called Neusoft, which has 13,000 employees, said China needed to change from being the “factory of the world” to focusing on the “China market”, and not ignore retail.
Dr Liu believes that with six million new graduates per year, China has no lack of talent but focus is the key issue. Going forward, C S Kiang, chairman of the Environment Fund at Peking University, agreed: “China cannot continue to be the factory of the world, it needs a knowledge base to proceed.”
Other delegates noted that the speed of the consumer market expansion in China and the move to services depend on how rapidly policies to unlock the large amount of accumulated household savings are implemented.
Naturally, the role of the US was discussed and one delegate warned: “One of the biggest risks to the world is that its sole hegemony is widely maligned as incompetent in both foreign and domestic affairs. America’s dwindling power could be accompanied by not only increased protectionism, but also a neo-isolationism that, in the absence of a successor as superpower, leaves the way open for rivalry and creates the potential for conflict.
“Asia is particularly vulnerable to such competitive pressures as the US pulls back from its long-standing role as a military and diplomatic counterweight in the region.”
At the forum, John Milligan-Whyte and Dai Min introduced two new books addressing the critical China-America political relationship and the business strategies needed between these powers for the future. Concerned over the US attitudes towards China the authors of China & America’s Emerging Partnership, A Realistic New Perspective, noted: “The reality is that if America continues to use the fallacious democratic peace theory and its assumptions as the core of its policy towards China, America will impede rather than accelerate the evolution of Chinese-style democratic institutions and decision making in China.”
They added: “The reality is that without effective political and economic collaboration between America and China and, therefore, between American and Chinese companies, China’s economic growth and competitive advantages will impact on America [put ting] great strains on the stability and sustainability of American-style majority rule democracy [in the US]. It is not in either America’s or China’s national security or economic interests for American-style majority rule democracy to be born prematurely in China or wither away in America.”
The WEF event provided valuable insight not only into understanding China but also in putting second-tier cities such as Dalian into the global spotlight. Next year the event is to be held in the key port city of Tianjin.
