With a major new economic growth cycle beginning, a new China is being born
Interview given to Sinocle on 8th March 2020
Sinocle: The epidemic has been raging in China for a month with over 3,000 deaths up to now. Some businesses have started up again, but most Chinese are staying at home. China’s economy has remained partly at a halt. How do you evaluate the impact of the epidemic on China?
First of all, we have to remember that China’s growth over the past ten years has lacked balance. It has been built on major infrastructure projects, financed by debt, on appropriation of American technology to which China no longer has access, and, lastly, on the Internet revolution and the smartphone industry.
The year 2020 is seeing the beginning of a new ten-year cycle, based on Chinese technology. I hope Europe will play the game by working with China, since the second phase of the digital revolution — which does not only affect the B2C sector (the media, trade and tourism) — will revolutionize the B2B sectors: finance, healthcare, manufacturing and company services. In short, Chinese growth over the last ten years has reached the end of a cycle and China is now preparing to speed up its digitalization. The home confinement of over 50 million people for several weeks has already forced people into the widespread adoption of a new way of life characterized by online services, telemedicine, teleworking, online education and video games. Teleworking is undoubtedly the most important phenomenon: it had been almost nonexistent, but the health crisis and the desertion of public transport have made it a major practice at national level. This makes it possible to envisage new smart-city-style developments in terms of flow management. With a major new economic growth cycle beginning, a new China is being born.
From a political standpoint, one can reasonably expect President Xi Jinping to seize the opportunity to strengthen the centralization of power, by attributing government failings to an excessive decentralization of responsibility and by making scapegoats out of the local authorities in Wuhan and Hubei province. When all is said and done, the big winner to emerge from the epidemic will be the government.
The third upheaval generated by the epidemic concerns society in general. The crisis will speed up the new way of life in China, a very different combination of offline and online than we have in the West. The Chinese will use more and more online services, whilst, for us in the West, the Internet is mainly used for the media, shopping and games. One extraordinary example of this is what happened in New York a few weeks ago. The city prohibited stores from refusing cash payments. The reason given was that “cashless” stores were practicing a form of discrimination against people without bank accounts or people who did not wish to pay using their telephone. This way of thinking — in short: the only way to obtain a financial service is to have a bank account and a credit card — is totally out of date. In Shanghai, everyone can do just the opposite, for everyone has a phone and everyone can use Alipay with its payment system by phone. By inventing inclusive banking, Alipay might say it has invented “the poor man’s bank”: you no longer need a bank account or a credit card and, what’s more, payments cost five to ten times less than by Visa or Mastercard.
China could therefore emerge strengthened by this virus: while it was previously lagging far behind in the online services industry, such services are now attaining a quality that is higher than in the USA, and at less cost.
S: Crisis in Chinese is made up of two words — “danger” and “opportunity”. The epidemic is undoubtedly a major crisis for China. How do you evaluate the dangers and the opportunities?
D.B.: Initially, the risk is that it may be some time before recovery takes place. The Chinese stock exchange has returned to its pre-coronavirus level, as if there were no problem. This seems excessive to me, because there really is a problem. The risk that we all face is that China’s recovery will be much slower than expected, not so much because of China — which wants to recover as quickly as possible — but because of the rest of the world, which has notably suspended flights to and from China. The government is going to have to rebuild confidence, not just the confidence of the Chinese people — by proving that the virus is under control — but also that of foreigners, who will naturally be mistrustful of China from a sanitary point of view. If one takes this view to an extreme, one might even consider that the USA would slow up its recovery by continuing to put out propaganda about the health and environmental risks in China. We shall have to keep a close watch on how quickly trade and air travel are re-established. Most of the financial markets tell us that it is above all the first quarter that will be affected. Chinese companies, as well as certain analysts, anticipate an impact on the whole of the first half of the year. Personally, I hope that things will recover in the second quarter. That is where the risk lies: the pace of recovery.
As regards opportunity, my main thoughts are for European companies. With the speed-up of digitalization comes a potentially huge market in IoT (the Internet of Things) — technology that requires both hardware and software. Europeans can gain a share in this market. This is the core of the message that Thierry Breton has been putting out since he has been Commissioner for Internal Market: Europe remains a continent of industrial production, especially when compared with the USA. Whilst America no longer produces hardware and only believes in software, Europeans must work together to produce both hardware and software. If the Europeans can arrive on the Chinese market with connected objects that the Americans cannot make — therein lies a real opportunity!
“When China shows a weakness — albeit a passing one, for history shows that the country bounces back after every crisis — we must not miss the opportunity, and the opportunity has never been as great as it is at this moment.”
As for the smart city, a new business model much flaunted by the regime in China, the problem of Wuhan shows only too well that China has not yet invented it. Wuhan is a city that is most impressive from an industrial standpoint, but which has shown how very vulnerable it is by having to bring everything to a sudden halt because it was lacking infrastructures in healthcare and food safety. This is where the French have much to offer China. The smart city is based on a non-physical service infrastructure, particularly business services, and France has world leaders in this field. Sodexo, Thales and Bureau Veritas — with 20% of its turnover coming from business in China — can sell their know-how and expertise with regard to the smart city.
My advice holds true mainly for French companies. It may seem counter-intuitive, but it is now that we have to take a serious interest in China. When all is going well for the Chinese, they don’t need us; but when China shows a weakness — albeit a passing one, for history shows that the country bounces back after every crisis — we must not miss the opportunity, and the opportunity has never been as great as it is at this moment. I advise French companies to return to China as soon as possible, even by the first plane… as soon as flights start up again! What’s more, the Chinese will remember that we came at a time when they were in a weak position — something that the Americans do not want to do. Another opportunity not to be missed.
If the crisis goes on beyond the second quarter, or even affects the second quarter, this will not be so much because of China’s domestic business but because the rest of the world has decided to isolate it. This is why it is vital for countries to talk to each other. When one looks at things objectively, we see 3,000 dead.This is a tragic figure, but one has to put it in proportion — ten million people die every year in China. From a strictly demographic point of view, the virus is not significant and must not bring the economy of the whole country to a halt. That would be senseless.
S: The trade war between China and the USA is in full swing. Although both parties have signed the first phase of a trade agreement, it is not always clear which way this war will go, particularly since China disclosed the epidemic on the eve of the implementation of the truce, and that we won’t know until November if Trump is re-elected or not. What do you think of long-term competition between China and the USA?
For three years I have been saying and writing that China and the USA are at war — a war that is going to last 10, 20 or 30 years, maybe even longer. This war is not linked solely to Trump’s presidency and his administration, it is going to last.
From my point of view, the war with Washington came ten years too soon for Beijing, because China is still too dependent on US technology. This is why the “Made in China 2025” plan has gone by the board. China did not have the means to carry it out without the USA which has withdrawn access to its technology and thereby penalized a large part of Chinese industry. China’s mistake was to have been too openly aggressive by proclaiming that it wanted to become the world’s leading industrial power and dominate the planet. These words gave President Trump an objective argument for developing a strategy that is both more protective of its technology and more warlike.
The “yemenization” of Europe: when the war between the USA and China continues, not on their own territory but in Europe.
In simple terms, the USA will put a surtax on our manufactured and agricultural products and China will take our technology without paying for it. This is what is happening now.
For the moment, the war is not visible, for both powers have entered a “cold peace” era and are officially at truce. This will last up until the American elections and, furthermore, the world economy has to be supported in order to avoid any worsening of the situation. On the other hand, after next November’s elections, we can foresee that the White House — especially if Trump is re-elected — risks becoming more aggressive towards China. And this will pose a truly major problem for the whole world.
S: In the present situation, the current strategies of France and the rest of Europe are not clear. How do you see their respective roles and any eventual countermeasures in the future?
This will depend on the way China behaves. We have changed century: Europe has been abandoned by the USA. This has been on three levels — economic, security and military — and we see this every day in Donald Trump’s actions. We now know that we can no longer count on the USA, for the alliance has been broken. But, at the same time, we do not trust China enough for us to let it replace the USA. There are therefore two possible scenarios for Europe. The first is the one that is happening before our very eyes and is what I call the “yemenization” of Europe, i.e. the war between the USA and China will continue, not on their own territory but in Europe, whose wealth they will pillage. In simple terms, the USA will put a surtax on our manufactured and agricultural products and China will take our technology without paying for it. This is what is happening now.
The European Union reacted last year, arguing that it could work with Beijing as well as with Washington, since the two of them are no longer working together. This is the second scenario. I believe that it is absolutely essential for China and the USA to work together. We have spent centuries globalizing the world: de-globalization will be more dangerous than globalization.
S: Huawei has been the first target of the USA in this war. Do you think that, as traditional allies of the USA, France and the rest of Europe should follow its lead and take the same action against Huawei?
D.B：The problem with Huawei is that the issue is political and not technological. Deciding whether to ban or to authorize Huawei is not a political issue. It is a technological decision and not one that can be taken by politicians. 10 or 15 years ago, the Americans made the strategic decision that intelligence in the value chain was not in the networks but in applications like Facebook and Google, and in telephones and providers, where the USA leads the field. They left the building of networks to the Chinese. But 5G marks the return to intelligence in networks, a field in which the USA is lagging behind. Hence their desire to make a tactical move and play for time.
Each sovereign state must take its position from a technological standpoint. It is not a question of banning or authorizing Huwaei, but of identifying anything in Huawei’s technology — as in American technologies — that might be a danger to national security. Every one of the EU member states must protect itself properly. The problem is that, up to now, European experts in technology have not told us with any clarity where the risk might come from. All the USA is doing, instead of helping us to identify potential problems, is to threaten to tax our automobile industry. This amounts to blackmail and we cannot accept it. I am no expert on technology, but if there is any danger for the French in using Huawei’s equipment, we must simply understand what it is and do the groundwork… Europe must take a position, take a technological risk and state clearly what it authorizes in Chinese or American technologies, and what it does not authorize. And any theft of Europe’s secrets will be because Europe got the technological analysis wrong.
Beijing still maintains that Hong Kong only accounts for 3% of China’s GDP, but bank assets in Hong Kong account for a quarter of the mainland’s GDP.
Without Hong Kong, the mainland cannot finance itself. Beijing therefore needs Hong Kong and Hong Kong definitely needs Beijing.
S：Two questions about Hong Kong. Hong Kong’s position as an international finance and trade center has been contested over the past months. Its economy has been considerably affected and there is uncertainty over its future prospects. And today, with Hong Kong affected by the epidemic, its status is even more delicate. You live in Hong Kong and have been observing it for eight years as an investor. What is your view on the changes there?
On an economic level, Hong Kong is suffering enormously from the tourism crisis. There are seven million people living in Hong Kong and 45 million tourists come from the mainland every year. This figure has fallen to zero since the frontiers were closed. The whole part of the economy linked to the hospitality and shopping sectors is therefore in sharp decline and will probably never get back to its previous levels.
In the finance sector, Hong Kong remains irreplaceable. Beijing still maintains that Hong Kong only accounts for 3% of China’s GDP, but never highlights the fact that bank assets in Hong Kong are eight times its GDP: Hong Kong bank assets therefore account for a quarter of the mainland’s GDP. Without Hong Kong, the mainland cannot finance itself. Beijing therefore needs Hong Kong, and Hong Kong definitely needs Beijing. If Hong Kong closes down completely, one could reasonable expect that in 20 or 30 years’ time, finance will move to Shanghai, business will move to Shenzhen and tourism to Hainan. The people of Hong Kong must understand that they have an unprecedented opportunity to assume their status as a stronghold of world capitalism, notably through the building of the Greater Bay Area, where China wants to launch the next phase of the digital revolution — connectivity between cities and within them, and the Internet of Things. If Hong Kong closes down, it will become like the Principality of Monaco — insignificant and without any influence. There are two misunderstandings here: the Hong Kong government does not understand its population’s fears of being controlled by Beijing; and Beijing does not recognize that Hong Kong still has an important role to play in the world of finance — as shown in the future stock exchange listing of Ant Financial Services. To my mind, the role of Hong Kong as a financial center will not be affected.
S.: Since last year, protesters in Hong Kong have thought that its political freedom has been reined in and that the principle of “one country, two systems” has been undermined. Some people fear that the political changes in Hong Kong will affect the confidence of Western investors. As an investor yourself, are you affected by this political change?
The Chinese are very pragmatic people. They don’t destroy something that works well. Beijing makes a distinction between political freedom and economic freedom: this is the Singapore model that we Westerners cannot understand because we are convinced that political and economic freedom go hand in hand. That is what that we in the West have been brought up to believe: you cannot have one without the other. The Asian model, as developed in Singapore and China, is the opposite: it is because political freedom is limited that economic freedom is possible.
This is not a very pleasing idea for Westerners, but the reality is that this development model has worked in China. To my mind, the model that China wants to impose on Hong Kong will always include less political freedom in order better to preserve economic freedom. If you realize that almost 75% of the mainland’s direct foreign investments pass through Hong Kong, then it is apparent that Hong Kong will retain its central role.