The Ins and Outs of China’s Globalization

In 2011, China surpassed the World Bank in lending to the developed world. Is the country assuming a globalization agenda?

By China Business Knowledge @ CUHK

China’s global profile and influence has vastly expanded over the last three decades. Today the country is not only the biggest exporter in the world; it’s increasingly becoming the biggest global investor and lender – particularly in the developing world – in Africa, Latin America and South Asia. China’s new role is incredibly beneficial to the global economy.

During the last four to five years, the world has experienced a big financial crisis, recession and subsequent credit crunch, and cross-border investment has plummeted. China has filled this sizeable void caused by the withdrawal of Western financial institutions and upped the flow of capital to the developing world, most notably so in Africa, where there is a critical need for investment in infrastructure, in order to build better schools and hospitals for instance. So Chinese capital plays a significant role in creating economic growth and jobs and reducing poverty in much of the developing world.

Mr. Fred Hu, Chairman and Founder of Primavera Capital Group, offers his insights on how China’s globalization strategy plays out with the rest of the world and how the new political leadership will change the nation’s business landscape.

How effective is China’s agenda of globalization?

China has begun to play an incredibly prominent role on the global stage – as the largest exporter, the biggest customer of natural resources and now as an important global investor. But in terms of institutions such as the IMF, the U.N. and the World Bank, China does not exert the same influence as the U.S. or Europe – there are still some gaps out there.

The Sino-U.S. conflict has always stirred tensions. Liberals in both countries tend to believe that globalization has made China and the U.S. interdependent and that any intentional provocation from either is highly unlikely. What’s your view?

The rapport between China and the U.S. is the single most important financial relationship of the 21st century. Over the past 40 years, the two countries have established a wide range of ties in areas such as the economy, trade and investment, education and cultural exchange. But I’m realistic enough to see occasional tensions and differences – this is just a fact of life. There are definitely those in the U.S. who still hold a “cold war” mindset, and see China as the new “rival” or “enemy.” Equally there are those in China who harbor nationalistic sentiments – and believe the U.S. is trying to “contain” China and prevent it from taking its rightful role on the world stage. I believe both views are wrong and are only held by a minority in both countries. But they can be destructive and undermine trust.

Nevertheless, I’m cautiously optimistic that China – particularly with its new leadership – and the U.S. can manage these tensions in light of their shared interests. With effort and diplomacy the two countries can build a strong beneficial relationship.

What does the U.S.’s “return to Asia” strategy mean to China – and is it perceived as a threat?

It’s definitely seen so by some – many of my friends, scholars and some in the military see this in a negative light. But historically, the U.S. has always been a dominant power in the Pacific. The U.S. was a dependable ally and supporter of China against the Japanese invasion during the second Sino-Japanese war. Even after the war the U.S. has always been deeply engaged in Asia and the Pacific.

Maybe the past few years have been a temporary aberration – tensions have arisen because of war in Afghanistan and Iraq and the geopolitics of the Middle East. But given the global importance of trade and investment in South Asia, we don’t want to blow these tensions out of proportion.

China has benefited from U.S. involvement in the region. There is no way the U.S. can be ejected from the Asia-Pacific region and of course as an Asian nation, China has a legitimate interest. But I believe there is scope for both the U.S. and China to play an active role in steering the region towards peace and prosperity. ”

Will China’s growth be significantly reduced by the slowdown in developed economies? How can China take advantage of the “cities surround the countryside approach”?

The past five years have had a big impact on China’s economic performance. As external demand has collapsed, Chinese exports have suffered. China has responded aggressively with an economic growth strategy which focuses on domestic demand. One of the most reliable drivers for this is urbanization. China has just passed the mid-point of urbanization but still has a long way to go. Over the next 20 years another 300-400 million people will move out of the countryside to cities and towns and the incremental urban population will be greater than the entire U.S. population. So urbanization is the single most powerful engine to drive domestic demand and create economic growth.

Clearly globalization has become a key word for many Chinese companies. For example, Lenovo’s acquisition of IBM’s PC business, Alibaba’s merger with Yahoo! China. Some of them are doing well, some are suffering. What’s your view on this type of globalization?

China has run a current account surplus for many years in a row, and has no choice but to recycle this surplus through overseas investment – some of it through buying securities such as U.S. treasury bills and some through cross border mergers and acquisitions.

Some investment in offshore state-owned companies has run into difficulties – sometimes because of resistance to the deal in the host country, or a clash of political and commercial interests. Chinese companies might also lack an understanding of the host country’s regulatory framework or market structure, and be caught off-guard and execute deals incorrectly. So in order to succeed Chinese companies need to do their homework and learn about the laws, regulations and commercial culture of different countries.
So despite China’s investment in infrastructure in Africa, there have been instances when China hasn’t paid enough attention to labor relations or environmental concerns, and has been criticized by the international media and NGOs. I believe China is very different from the European colonial powers of the 19th and 20th centuries and must be careful not to give an impression of neo-colonialism.

What impact will a change in leadership have on China’s future? Will this herald a change in China’s economic model?

China’s new leaders are very much aware of the challenges facing the country and of the need to change the reliance upon exports. I’m very bullish about China’s prospects in the longer term. With the right policies in place to accelerate urbanization, China stands a good chance to achieve this economic transformation. The next ten years will be crucial in laying solid foundations for China to continue to grow at a faster pace, so it can overtake the U.S. in terms of GDP and achieve high income status by 2030.

We know demand for China’s exports has fallen. How will the new economic policies actually work – how will the government drive domestic growth?

Urbanization will fuel demand for infrastructure. An extra 300-400 million moving to cities and towns will boost demand for housing, cars, consumer goods, food, health care and entertainment. So even if the global recession continues there will be enough internal demand to maintain growth.
But more policies need to be implemented. China must undertake major reform of its household registration system which has so far been holding back urbanization. China also needs to overhaul its social security system and introduce better pensions, health care and unemployment benefit in order to boost consumer confidence and to encourage people to loosen their purse strings and spend more.

China will also have to implement financial reform in order to make consumer credit more available. This doesn’t mean we risk replicating the U.S. scenario which saw people spend beyond their means – but China is at the other extreme: households tend to underspend and over-save. But through reform of housing, social security and finances, China can boost consumption – I’m very optimistic about China’s economic potential and long-term prospects.

How much is this drive to boost internal demand a reaction to the global economic crisis – or would China have introduced this economic strategy anyway?

When there was huge demand for Chinese exports there was no incentive to change. But recession in the U.S. and Europe for the last five years has seen demand collapse and put pressure on China to speed up the transition from an export-led to a more internally-driven economy. The crisis has certainly been a catalyst for change.

Given Hong Kong’s proximity as a special region, how does it fit in to this strategy?

Hong Kong has already benefited tremendously from China’s economic growth over the decades and will continue to enjoy new opportunities. Hong Kong has the most advanced economy in greater China. Hong Kong is in a good position to provide sophisticated and respected professional services for China in terms of legal surveys, consulting and legal services, marketing and branding. As long as China continues to grow, Hong Kong is well-positioned and will enjoy healthy prospects.