As in the past, in­te­gra­tion key to the fu­ture

China Daily (Hong Kong) - - COMMENT - By PETER WIL­LIAMSON Vi­tal con­trib­u­tor to global sup­ply chains Suc­cess sto­ries of for­eign firms Shift fo­cus from quan­tity to qual­ity Es­sen­tial to in­crease peo­ple’s pro­duc­tiv­ity China com­mit­ted to fur­ther open­ing up

One of the things that makes China unique in the an­nals of eco­nomic his­tory is the fact that it opened up to world right from the begin­ning of its cur­rent wave of eco­nomic de­vel­op­ment. This is in sharp con­trast to other Asian coun­tries, such as Ja­pan and the Repub­lic of Korea, which largely shielded their do­mes­tic mar­kets from the out­side world un­til af­ter they were well down the path to be­com­ing de­vel­oped economies.

Late leader Deng Xiaop­ing fa­mously ob­served in De­cem­ber 1978 that “En­gels never flew in an air­plane; Stalin never wore Dacron”. His think­ing rec­og­nized that China’s eco­nomic de­vel­op­ment would need to be based on ac­cess to new tech­nolo­gies. An im­por­tant source of those new tech­nolo­gies and ideas was Deng’s de­ci­sion to al­low multi­na­tional com­pa­nies to come and in­vest in China and to im­port tech­nolo­gies from over­seas.

This open­ing-up proved to be one of the most de­ci­sive fac­tors in driv­ing China’s mod­ern eco­nomic rise.

China’s open­ing-up started grad­u­ally. In the 1980s and 1990s, China be­gan ex­per­i­ment­ing with open­ing up to for­eign in­vest­ment in se­lected coastal cities and in spe­cial eco­nomic zones. The fo­cus was on at­tract­ing ex­port-ori­ented man­u­fac­tur­ing which laid the foun­da­tions of China be­com­ing a man­u­fac­tur­ing powerhouse.

In 1978 when the coun­try be­gan to re­form and open up, it ac­counted for less than 1 per­cent of global ex­ports of goods. Over the next 40 years, China’s share grew con­tin­u­ously, ac­cel­er­at­ing around the time of its en­try into the World Trade Or­ga­ni­za­tion in 2001. To­day China ac­counts for al­most a quar­ter of all global man­u­fac­tur­ing out­put by value. As its ca­pa­bil­i­ties have de­vel­oped, China has also be­come a much more im­por­tant con­trib­u­tor to global sup­ply chains.

Ini­tially, most of the man­u­fac­tur­ing ac­tiv­i­ties in­volved the assem­bly of low-value prod­ucts such as gar­ments and toys. Even 15 years ago only about half of the value added in China’s ex­ports was cre­ated in China; half of the value was em­bed­ded in parts and com­po­nents that China had im­ported and as­sem­bled. To­day the per­cent­age of value that is added in China is es­ti­mated to be more than two-thirds.

The for­eign com­pa­nies that have come to China have made an im­por­tant con­tri­bu­tion to this trans­for­ma­tion in China’s ca­pa­bil­ity to add value to the prod­ucts and ser­vices it makes in huge vol­umes. Ac­cord­ing to the for­mer State Ad­min­is­tra­tion for In­dus­try and Com­merce, al­most 500,000 for­eign-funded com­pa­nies have been es­tab­lished in China with their cu­mu­la­tive in­vest­ment stock reach­ing nearly $5 tril­lion. The for­eign com­pa­nies have brought new tech­nolo­gies and new skills, they have trained Chi­nese staff in new tech­niques, and they have helped de­velop a huge ecosys­tem of ca­pa­ble sub-con­trac­tors and sup­pli­ers span­ning ev­ery prov­ince in China.

The Chi­nese econ­omy, con­sumers and work­ers have gained enor­mously from the pol­icy of open­ing-up started by Deng and con­tin­ued by his suc­ces­sors. With many new ideas and tech­nolo­gies flow­ing in from abroad, the Chi­nese em­braced them, mas­tered them, and then started to add their own ideas and in­no­va­tions to fur­ther im­prove what they had learned from other coun­tries. With­out open­ing-up, which stim­u­lated this pos­i­tive cy­cle of learn­ing and in­no­va­tion among the Chi­nese, China would never have been able to achieve so much so quickly.

Of course, multi­na­tional com­pa­nies and con­sumers over­seas have also greatly ben­e­fited from China. Plenty of multi­na­tion­als are do­ing well in China. One of the great ex­am­ples has been that of Volk­swa­gen AG, which is the largest and ear­li­est in­ter­na­tional partner in China’s au­to­mo­tive in­dus­try.

Volk­swa­gen en­tered China as early as in 1978 and has re­tained the lead­ing po­si­tion in the Chi­nese au­to­mo­tive mar­ket over the past three decades. China is Volk­swa­gen’s largest mar­ket. Rapidly grow­ing sales in China al­lowed Volk­swa­gen to over­take Toy­ota to be­come the world’s best-sell­ing au­tomaker for the first time. In 2017, it sold over 3 mil­lion ve­hi­cles in China, ac­count­ing for al­most half of its global unit sales.

The pat­tern is re­peated for many other for­eign car mak­ers: Ford typ­i­cally gen­er­ates one-third of its global prof­its in China; for Gen­eral Mo­tors and BMW the fig­ure is around a quar­ter. China has also con­trib­uted to multi­na­tional com­pa­nies’ suc­cess in many other in­dus­tries from ma­chin­ery and equip­ment right through to fast food. Be­fore its re­cent de-merger, Yum Brands, for ex­am­ple, which owns fast-food out­lets such as KFC and Pizza Hut, earned more than half its global prof­its in China.

For­eign con­sumers, too, have ben­e­fited from China’s ris­ing ca­pa­bil­i­ties and im­proved pro­duc­tiv­ity that have en­abled them to buy goods at lower prices and en­joy bet­ter value for money. In fact, aca­demic re­search sug­gests China’s af­ford­able ex­ports have en­abled con­sumers in the United States and Europe to im­prove their real pur­chas­ing power by hun­dreds, and in some cases thou­sands, of dol­lars ev­ery year.

To­day, how­ever, the decades of pos­i­tive de­vel­op­ment and the ben­e­fits they have de­liv­ered both for China and the global econ­omy are com­ing un­der threat from the forces of uni­lat­er­al­ism and mount­ing trade pro­tec­tion­ism.

So what poli­cies should China pur­sue go­ing for­ward?

Pres­i­dent Xi Jin­ping has re­cently re­ferred to China en­ter­ing a “new era”. While this is cor­rect, it doesn’t mean the poli­cies should be re­versed. In­stead, China needs to build on what has gone be­fore. It will also need to in­cor­po­rate new ini­tia­tives. This will re­quire a consistent strat­egy, im­ple­mented through hard work sus­tained for many years.

First, China’s em­pha­sis will need to shift from sim­ply growth tar­gets to the qual­ity of growth. China’s rapid ex­pan­sion in re­cent decades has brought enor­mous ben­e­fits. But it has also come at costs: harm to the en­vi­ron­ment, ris­ing in­equal­ity, a fo­cus on ma­te­rial suc­cess rather than qual­ity of life and hap­pi­ness.

Growth needs to be­come much more en­vi­ron­men­tally sus­tain­able, more in tune with pre­serv­ing the nat­u­ral world. That will re­quire se­ri­ous ef­forts and in­vest­ment to re­pair yesterday’s en­vi­ron­men­tal dam­age. It will also mean that new, im­proved tech­nolo­gies will have to be used to re­duce fur­ther dam­age to the en­vi­ron­ment: re­new­able en­ergy, us­ing biotech­nol­ogy to re­duce the use of chem­i­cals and im­prove re­cy­cling, a shift to elec­tric ve­hi­cles for mov­ing both peo­ple and goods. The em­pha­sis will also need to shift from peo­ple sim­ply con­sum­ing more “things” to­ward sat­is­fy­ing other de­mands if the qual­ity of their lives is to im­prove: bet­ter schools and health­care, cul­tural ex­pe­ri­ences and fairer ac­cess to courts and the jus­tice sys­tem.

China should co­op­er­ate even more closely with for­eign com­pa­nies and in­di­vid­u­als around the world to com­ple­ment its home­grown in­no­va­tions with di­verse new ideas, tech­nolo­gies, and aes­thet­ics that arise from the unique and dif­fer­ent com­bi­na­tions of re­sources, his­tory and cul­ture that ex­ist in coun­tries around the world.

Sec­ond, China can play a more ac­tive, in­te­grated role in the world, com­men­su­rate with its size and sta­tus: home to 20 per­cent of the world’s pop­u­la­tion and the sec­ond-largest econ­omy (soon to be the first). This means play­ing a big­ger role in global gov­er­nance, ac­tively sup­port­ing in­ter­na­tional co­op­er­a­tion and global eco­nomic in­te­gra­tion, and help­ing other coun­tries to de­velop.

Pres­i­dent Xi has also fore­shad­owed this. One part will in­volve build­ing in­fra­struc­ture and pro­mot­ing trade and de­vel­op­ment along the Belt and Road routes. But it will also mean com­bin­ing ex­pe­ri­ences and ideas from many other coun­tries with China’s own knowl­edge and strengths. This will re­quire fa­cil­i­tat­ing in­ter­na­tional di­a­logue and in­ter­ac­tion to open up many more op­por­tu­ni­ties for work­ing to­gether on in­no­va­tions with coun­tries with com­ple­men­tary know-how and ex­pe­ri­ence, in or­der to come up with novel solutions to the big global is­sues fac­ing all hu­man­ity, such as pro­vid­ing for ag­ing pop­u­la­tions and fight­ing cli­mate change.

Third, to avoid the so-called mid­dle-in­come trap, China will need to find ways of con­tin­u­ing to in­crease the pro­duc­tiv­ity of its peo­ple, its cap­i­tal and its re­sources at a rapid rate. This might prove to be the most dif­fi­cult chal­lenge of all. Re­form of Sta­te­owned en­ter­prises, in par­tic­u­lar, will need to con­tinue to im­prove their ef­fi­ciency. The pri­vate sec­tor will need to be en­cour­aged and helped to im­prove its value-added and to in­no­vate. New tech­nolo­gies such as ar­ti­fi­cial in­tel­li­gence, man­u­fac­tur­ing 4.0, and quan­tum com­put­ing will have to be har­nessed and de­vel­oped.

Be­sides, the fi­nan­cial sec­tor’s ca­pa­bil­i­ties will need to be en­hanced. In­ef­fi­cien­cies will need to be re­duced, old poli­cies and pro­ce­dures that im­pede the free flow of ideas, money and re­sources will have to be elim­i­nated.

China has al­ready taken many im­por­tant steps for­ward in these ar­eas. Com­pa­nies such as Alibaba and Ten­cent, for ex­am­ple, of­fer pay­ment por­tals us­ing su­per-apps that have 90 and 40 func­tions re­spec­tively, far in ad­vance of any­thing in the rest of the world. Chi­nese com­pa­nies have also be­come pi­o­neers in the use of big data. Alibaba’s credit scor­ing sys­tem for busi­nesses and con­sumers, Sesame Credit, for ex­am­ple, up­dates the score con­tin­u­ously in real time us­ing data that is not only based on fi­nan­cial met­rics, but also cus­tomer re­turns, cus­tomer sat­is­fac­tion, stock turn and dis­count­ing, to in­crease ac­cu­racy.

Chi­nese com­pa­nies have also used big data anal­y­sis for bio-in­for­mat­ics to sup­port, for ex­am­ple, Car-T (Chimeric Anti­gen Re­cep­tor Ther­apy), which ex­tracts pa­tient’s white blood cells, ge­net­i­cally re-en­gi­neers them, and then re-in­jects them to fight can­cers and other dis­eases.

But the de­vel­op­ment and ap­pli­ca­tion of lead­ing-edge sci­ence and tech­nol­ogy works best when re­searchers from di­verse coun­tries and back­grounds work to­gether as in­ter­na­tional teams and com­pa­nies co­op­er­ate as an ecosys­tem of in­ter­na­tional partners. So given the grow­ing pres­sures to roll back glob­al­iza­tion in some parts of the world, this will re­quire China to bravely adopt a new phase of com­mer­cial lib­er­al­iza­tion. This is es­pe­cially nec­es­sary in the ar­eas of re­search and com­mer­cial­iza­tion of new tech­nolo­gies and in the trade in ser­vices.

China is al­ready mak­ing some moves in this di­rec­tion. The Min­istry of Com­merce and the Na­tional De­vel­op­ment and Re­form Com­mis­sion have is­sued a re­vised Cat­a­logue for the Guid­ance of For­eign In­vest­ment In­dus­tries. This opens up for­eign in­vest­ment by adding a num­ber of in­dus­tries — such as in­tel­li­gent med­i­cal equip­ment and 3D print­ing — to the “en­cour­aged sec­tion” of the rules.

More im­por­tant, Premier Li Ke­qiang has an­nounced that China will fur­ther open up its ser­vice sec­tor by ex­pand­ing the pilot pro­gram for the in­no­va­tive de­vel­op­ment of trade in ser­vices, rolling it out in 17 ar­eas, in­clud­ing Bei­jing, Shang­hai and Shen­zhen, from July 1, 2018, to June 30, 2020.

China’s open­ing-up and em­brac­ing ex­changes with peo­ple and coun­tries across the world has played a very im­por­tant, and some­times un­der-ap­pre­ci­ated, role in China’s im­pres­sive eco­nomic growth and de­vel­op­ment over the past 40 years. China can best achieve its am­bi­tious goals for fur­ther de­vel­op­ment and play a more com­pre­hen­sive role in the global com­mu­nity com­men­su­rate with its size and long his­tory, by em­brac­ing a new phase of open­ing-up.

This will re­quire poli­cies in three ar­eas: Poli­cies that stim­u­late a new round of both in­ward and out­bound for­eign di­rect in­vest­ment; poli­cies to de­velop in­sti­tu­tions and mech­a­nisms to en­able China to play a more ac­tive role in global gov­er­nance; and poli­cies that en­er­get­i­cally pur­sue re­form and dereg­u­la­tion of its in­dus­try and com­merce to stim­u­late in­no­va­tion and pro­duc­tiv­ity improvements, com­bin­ing tech­nol­ogy and ideas from around the world with Chi­nese know-how.

Based on its past track record, I am con­fi­dent China will rise to this new chal­lenge, too.

The au­thor is a pro­fes­sor of in­ter­na­tional man­age­ment at the Univer­sity of Cam­bridge Judge Busi­ness School, and a fel­low of Je­sus Col­lege, Cam­bridge. This ar­ti­cle is an ex­cerpt from the up­com­ing book The Sleep­ing Gi­ant Awakes, edited by China Watch, a think tank pow­ered by China Daily.

SONG CHEN / CHINA DAILY

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