By Reshma Kapadia
Updated Nov. 22, 2019 8:57 am ET / Original Nov. 22, 2019 4:58 am ET
Economist Keyu Jin is something of a China whisperer, breaking down myths about the world’s second-largest economy and explaining how China’s rise could reshape the world order and reverberate through the global economy to executives and bankers.
Jin grew up in Beijing, sharing a love of literature and history with her father, a Chinese politician and banker who now heads the Asian Infrastructure Investment Bank. At 14, Jin moved to New York to attend high school, and later went to Harvard University. Now, Jin is an associate professor at the London School of Economics and Political Science, sits on the board of luxury-goods firm Cie. Financière Richemont, and is frequently tapped at global economic pow-wows to explain the changes underfoot in China.
Barron’s spoke with Jin to dispel some of the biggest China myths, and to find out what the next era of globalization looks like and how younger generations will change China.
Barron’s: What are some of the big myths you hear about China?
Keyu Jin: What China’s slowdown signifies. Yes, the growth rate is slowing down, but there is still substantial room for growth and opportunities in a number of sectors. China still has some way to go from a $10,000 per capita income nation to a $30,000 per capita income nation. That is the challenge—and also the goal. It would require pushing China toward an efficiency-based and innovation economy.
Another myth is that China is a technological leader. In some areas, Chinese technology may be world class, but China is not a high-tech leader yet. This requires institutions, a certain income level, and the right mind-set. But China is still a nation rising to success based on speed and scale. To become a technology leader, basic research, process innovation, incremental innovation, and niche specialization are requisite. Copying technology and designs is a lot easier than copying institutions.
U.S. trade tensions, though, have accelerated the push for more fundamental, real technology development in the nation, as more resources have gone toward research and development.
You bring up trade. What’s China’s approach to the trade war and a possible initial deal?
[The Chinese] view a phase-one deal as a “face deal,” not necessarily a substance deal. It’s a necessary step to signal the intention and desire to get closer to [a deal], even though there are a number of demands China won’t be able to meet because in their minds they are unreasonable requests.
On state-owned enterprise subsidies, they have the intention of reducing them anyway because [the subsidies] create excess capacity [in the economy]. On the demands about industrial policies, every country is entitled to its own industrial policies, especially emerging markets, as long as it doesn’t infringe upon trade relationships, and that’s an arguable area.
Intellectual-property protection has also been a sticking point. Where is China on that concern?
China has some of the most comprehensive IP-protection legal frameworks, especially within its income group, and is one of the largest patent-granting nations. But when it comes to design or blueprints, that’s where the [IP] problem arises. There’s a difference between what the state intends and private practices, but the intention is to strengthen and accelerate IP protections. This notion of copying and imitating other people’s knowledge is not well respected because it’s not in our culture. [To change that] national consciousness, it should be started with education. China has even set up courses to teach kids about IP protections.
What does this reset of the U.S.-China relationship mean for globalization?
To some degree, it’s a large reversal of globalization. The features of a new era of globalization are technology cooperation and competition, and trust is a critical input. To adopt a nation’s technology standards—5G, operating systems, and various tech apps that require sharing your personal or national data—trust is a key part. That wasn’t the case for trade in products and commerce, and it was about cost and competitiveness.
This is where the big challenge is [for China]. Trust stems from various aspects of soft power, an ability to communicate to the world what its intentions are and transparency—not something China does well. But in this new era of globalization of technology cooperation and competition, this is a critical input.
Some Chinese companies are looking to become more global. How does that play out in this new era of globalization?
U.S. and Chinese companies are going to be dominant in their own markets, and then it will be the third—or this big “other” part of the world—that will be open for grabs. There are areas China will win. Look at Uber versus Didi Chuxing: The Chinese are better at being slow and tailoring to local needs in countries like Brazil and getting at the pain points in a market, whereas U.S. technology companies have more of an approach of imposing the model they have won with in...the U.S.—and doing it quickly.
Can China continue to be a major source of growth for U.S. multinationals?
China will still be among the most business-friendly [countries] in the world, definitely within emerging markets. We can see it with new steps to open up financial services and [efforts] to attract more foreign investment. That is still the goal and priority. Foreign multinationals made a lot of profits at the beginning, but over time they got outcompeted by Chinese [companies] with better products at cheaper prices. But there are things the Chinese will still want to import—for example, high-end consumer products and services, education, entertainment, health care.
What is missed if investors just look at China through a Western lens?
People have identified China’s slowdown and are correct to raise the debt and shadow-banking issues, but not right to use the same metrics to judge if the economy is likely to have a crisis because the political economy works differently. A lot of Chinese-specific characteristics make it very different from the U.S. For instance, the ability of the state to coordinate parties: The state bank owns the debt, and state-owned enterprises, or SOEs, can tell various parties what to do, stemming a financial panic. In the U.S., the government has limited tools, and its actions are subject to high public scrutiny; China doesn’t have that problem.
What, then, is the risk investors should focus on?
The root of the problem: China still has an old model of growth based on credit-driven and state-directed business cycles, with misallocation of resources to SOEs but also to private firms that have connections—and [that money] flows to real estate and infrastructure. It’s like a drug. China is on a steroid model of growth. The government is endeavoring to transition to the new model, which is based on innovation, private enterprises, and technology.
What is the biggest risk China faces over the next 12 to 18 months?
The U.S.-China long-term tension and competition is still going to be very important for where the country—and the world—goes, especially when it comes to technology decoupling and what it implies for Chinese domestic companies striving for technology independence and global competitiveness. That will shape many of the dynamics of the Chinese economy.
For the domestic economy, the new normal is slower but hopefully safer and more quality growth. The risk is substantially slower growth that leads to financial problems. If there’s a wave of defaults, it will be harder for the government to step in and resolve the problems.
What role do Chinese millennials play in China’s political and economic future?
It’s going to cause a paradigm shift. They have seen the nation’s increasing power but also the remarkable achievements in technology and innovation, so they are very proud of being Chinese. And they are less inclined to look to the West for inspiration and aspiration, as was case in previous generations, when making it overseas was the hallmark of success. That is definitely no longer true. Making it in China is the main goal, as they see much more opportunity.
What does the shift mean geopolitically?
[This generation is] less likely to play softball with the U.S. and Western powers. They think the rules of the game in the world are designed as solutions to problems the West created and that emerging markets had virtually no voice in the design of the global system. Clearly, emerging markets have much more importance now and want to have a voice.
That’s a fundamental shift. Geopolitically, greater confidence in one’s own country means they will push for national characteristics and being proud of the system and model that China has used to achieve its success. The past generation was about being a humble listener and observer. When China first joined the global system, they changed thousands of rules to abide by World Trade Organization rules. Now, that is no longer the case. They want to express their opinion and participate in the global discourse. They, unlike the U.S., don’t want to withdraw because that means less influence.
Chinese millennials are also driving much of the consumption investors are focused on. How will that change China?
The new generation is less risk-averse and the generation, especially those born after the 1990s, is much more socially aware. They are searching for a higher cause than consumption and materialism that was good enough for the previous generation. As China goes from becoming the world’s largest saver to the world’s largest consumers, this new generation is going to change how firms and governments operate.
The new economy of services and technology has a very different relationship with the state. When you are a real-estate company, you have to dine and wine the local government every single night. With the new economy, the local government is almost irrelevant. That form of political economy—where the local government has its own ecosystem of lifting private enterprises and implementing the central government’s objectives by promoting certain firms in certain sectors—can be broken. The younger generation cares less about schmoozing local governments and much more about fostering the best corporate culture, entrepreneurial and being fast and reactive to the market.
It’s the paradox that confounds people. Does China move toward a capitalistic framework and becoming more like the West?
It’s still going to be mixed. China’s model is still unapologetic about using state capacity to improve people’s livelihoods in a way they deem is good. That doesn’t mean intervention in the markets but certainly a lot of social and economic policy geared toward redistribution to the poor or limiting certain reckless market behavior. If you look at the real economy, especially the internet sector where private enterprises are very active, it’s a boisterous competitive place with little government intervention and a huge amount of domestic competition. When there’s a problem, the government will come and regulate it. But before the model is tested, they will let you experiment.
How does the young generation view the Hong Kong protests and, more broadly, China’s current political system?
The biggest difference between the young generation on the mainland and in Hong Kong is that the former believes they have great future prospects whereas the latter believes future opportunities are dim. The events in Hong Kong have shown to a vast majority of people in mainland China the downsides of chaos and bad governance and reinforces their belief that democracy does not always bring about peace and prosperity. What is happening in Hong Kong is tragic for its people, who are frustrated with rising inequality, lack of opportunities, and future prospects—very similar to many of the challenges experienced around the world. The root cause is complex and multifold. Mainland China has its own problems, but at least the young generation counts on an exciting future.