Nearly a year after President Xi Jinping announced that China's economy would increasingly be guided by market forces, many foreign companies are finding life more difficult.
After decades of a “golden age” fueled by cheap manufacturing and exports, China’s economy has entered a more mature “silver age,” says Jörg Wuttke, president of the European Union Chamber of Commerce in China and chief representative of BASF China. Like any maturity, this phase, which President Xi Jinping has spoken of as the “new normal,” is marked by complex challenges.
In its recent European Business in China Position Paper 2014/2015, the chamber, which represents more than 1,800 European companies, says the Chinese leadership’s pledge last November at the Communist Party’s Third Plenum to give the market a “decisive role” in the economy has “laid a bold groundwork” for changes that it needs in order to shift up a gear and become a developed economy, like South Korea or Japan. But recent punitive measures that seem to target mostly foreign companies are raising questions about whether the authorities are serious about allowing the market to function more freely.
In an interview, Mr. Wuttke said that nothing short of a “domestic W.T.O.” — World Trade Organization-like agreements to end protectionist barriers against foreign companies and between many provinces — will ignite a new growth spurt and avoid the stagnation that has mired many middle-income economies. Excerpts follow:
In the paper the chamber talks of a “domestic W.T.O.” Why did you choose this phrase?
I chose that parallel because I think China entered the W.T.O. with great difficulty. There was big political resistance. It was very difficult to convince the country it could win and that the West would not take over.
And then, the economy was far more successful after reducing trade barriers got China connected with the world, and it went from 3 percent of global market share to 15 in no time. So the phrase “domestic W.T.O.” again points to resistance, difficulty, reform. It takes political guts to break down barriers.
China is not a country to me, it’s like a continent, with member states. One province protects itself against the others and subsidizes its local champions, and so forth. There would be so much more domestic G.D.P. power in this country if they would knock down these barriers and prevent provinces from protecting local champions. The W.T.O. was exactly this process, and China benefited greatly. So why not do the same for domestic industry?
Did the Third Plenum’s decision go far enough in making that possible? State protection of industry is a persistent reality here.
That’s where the European Business in China Position Paper differs from the Third Plenum decision. They clearly say that state-owned enterprises have to have a dominant role, and we clearly understand that in some areas — in defense and energy — you might want to safeguard your economy. But I think it’s too broad and it carves out special interest groups that Chinese private enterprise and foreigners might find too hard to compete against. So I conclude that their talk about reform of state-owned enterprises means we’ll whip them into shape, we’ll make them more competitive. But we might not necessarily expose them to the same market forces.
It’s like playing soccer where you are playing against a team with a referee that’s wearing the same T-shirt as your opponent.
China undoubtedly has challenges, but as the paper notes, “China has a strong track record of managing its past economic challenges with better results than many had predicted possible.” Can China muddle through the challenge of declining economic growth and move up the value chain without making major changes?
Well, it is the “Muddle Kingdom.” But now it’s a less coherent story. We can only imagine how difficult it was for Deng Xiaoping in the early 1980s to convince them to get reform going, to establish Shenzhen [Special Economic Zone] and so forth. And then the next plateau of nonaction was the early 1990s, until Deng went to the south in 1992, and what effort it took to whip the country into shape. The next stage was Prime Minister Zhu Rongji basically guiding China into the W.T.O., getting the capital markets going, exposing state-owned enterprises to I.P.O.s, laying off 24 million people. That was not muddling through. That was breathtaking.
And then basically you had 10 years [from the early 2000s] of cashing in on those reforms, but now the effect is fading. Now you have a situation where you cannot muddle through anymore. The last 10 years looked like muddling through. Lots of problems here and there, but the basics were right — everything was done in the late 1990s by Zhu and his team. And now what? Do they have the guts to make difficult decisions again like in the late 1990s? So when we read the Third Plenum decision last November we thought they were reconnecting to the reform spirit of the 1990s. And by that I really mean Deng Xiaoping’s kind of breakthrough — let them get rich — and secondly, Zhu’s institutional breakthroughs. They talked about rule of law, they talked about all kinds of things that we benchmark in the position paper and we thought, O.K., they have seen the same writing on the wall that we do, that you can’t benefit anymore from the ’90s reforms. There has to be a new ignition.
You have criticized the current moves, in which foreign companies are being investigated and fined by the government for allegedly monopolistic behavior. Why?
Transparency is the big thing for us. If they investigate, we really want to have a comprehensive explanation from the regulator as to why the government didn’t like a company’s business model and why the penalty came down as it did. This is something you have in Europe and the United States, where the regulator educates the market with its final judgment. But in China it’s come across as, “We punish them and they have to lower their prices.” And lowering prices is not the aim of a competition law. Its aim is to strengthen the competition landscape so as to eventually lower prices. So we thought it was sending the wrong message to the market.
We said they were disproportionately targeting foreigners. The problem is we can’t check or verify the data. They have a communication problem. What I hope is that every case gets better argued by the regulators and every case gets its fair share of publicity, so the market can learn from the findings. It’s not that we are accusing the regulators of doing something anti-foreign. It’s just: “Talk to us.”
You’ve talked about China’s coming “silver age.” Is that what’s happening?
The labels are a question mark, but I think there is a new awareness that the days of double-digit growth are over, that globalization and exports will not lead growth anymore. There are the obvious headwinds of demographics, overbuilding and overemphasis on fixed-asset investment. But the good thing is that we see Xi Jinping talking about it, calling it the “new normal.” So for us the question is, now we go into — what? More consumption? More services? Lower growth?
Where’s the opening up of the service sector? That is the area where foreigners are the most constrained — bankers, lawyers, accountants. The whole point of not having foreign banks here is that the government complains Chinese banks are not up to it. And even while they say this, Chinese banks are buying into Europe and establishing one branch after another. So for us the question is, how can they not be competitive if they’re competing with us in Europe?
If China really wants to open up that sector, where we believe there’s the most employment-intensive growth possible, what are they going to do about it? So our paper has hundreds of recommendations, and most of them are in the service sector.
Do you see European firms tempering their commitment to China as they see risk? Cars are still going strong.
The last sector of European business to turn out the lights here will be the car industry. They still have years of “hallelujah” to go. And car components.
There was always this expectation over the last 20 years of opening up, and all of a sudden people are realizing that they’re not opening up in, say, health care equipment. China is aging, pollution makes everybody sick, it needs health care. But all of a sudden you realize, health care, yes, but without you.
Because it’s just for the Chinese. They go for the local champions. They say, “Why should the foreigners cash in on our business?” The regulatory environment is getting tougher in health care. Definitely.
For example, China pollutes big-time. So the expectation is that there is a big market. We can all invest and be merry. And all of a sudden you realize, no, no, no, with local procurement policies, even if you’re invested in one province, another province may not buy from you because you’re from the wrong province. And they don’t want imported things. There’s local nationalism that says, “Why buy from a French company or a German one?”
So what’s the solution?
The solution is a domestic W.TO. That they knock down all these barriers in order to give the localities the choice to buy the best, at the best price.
http://sinosphere.blogs.nytimes.com/2014/09/22/q-and-a-jorg-wuttke-on-the-future-of-chinas-economy/ -- gReader
