In the first installment of a two-part interview, a Hong Kong-based investor and author says China will 'never Westernize'
David Baverez: Brexit is a big loss both for the UK and Europe. The recent Hong Kong demonstrations have proved that London lost its weight on the international scene. While the best hope for structurally reforming the inefficient Brussels bureaucracy was the UK German alliance, Germany is now left on its own to reform the EU. Let us hope that it succeeds.
AK: How would you assess the investment treaty between Europe and China? What are the pros and cons of this arrangement?
DB: I feel inclined to look at this agreement in a favorable manner: First, the timing is perfect, as it shows China that Europe is ready to decouple from the US, if China changes attitude towards Europe.
Second, anyone familiar with doing business in China will understand that like any contract with China, this agreement should be perceived more as a letter of intent than a binding contract. The key factor will be its execution on a case-by-case basis.
Third, it seems to have finally buried the ineffective concept of reciprocity, to focus on complementarity, targeting specific industries where China clearly needs European input in: finance, health, cloud services, electric vehicles, and renewable energy.
AK: What about ecological cooperation? What can Europe and China do together in this highly important area of mutual concern?
DB: The environmental sector is interesting in the way it shows how Chinese leadership learns from its past mistakes. China started advertising its “Made in China 2025” plan far too early, back in 2015, allowing the US to figure out its counterattack.
Conversely, the “China Net Zero” plan was announced only in September 2020, once China had established complete control over the bottlenecks of the industry’s value chain, like the polysilicon or photovoltaic glass (PV glass) in the solar industry. China is already mastering all the parts of the value chain that are driven by economies of scale.
Yet Europe has still an important role to play in all the aspects relating to ecosystems where China is lagging behind, like the management of the smart grid.
AK: Some of our Anglo-Saxon “friends” seem to be infuriated by the fact that China “didn’t become Western, though the West becomes more Chinese.” To what extent is this allegation true and if so, should we not give Beijing credit where credit’s due – especially in China’s quite impressive ability to imposing unpopular measures to the benefit of the younger generation, rather than defending the existing privileges enjoyed by the elderly?
DB: While France is historically known for being the country of “human rights,” China is the country of “human duties.” Hence Beijing has highly impressive ability to gather 1.4 billion people behind a common objective: to be No 1 in 2049 – the ability cruelly missing in Europe nowadays.
AK: Isn’t it really paradoxical to see a country like China being led by old people but with the youth in mind, while in Europe, if nothing changes, we run the risk of having young leaders still making an old man’s policies?
DB: You are right, we are facing this paradoxical situation where we have a young president in France acting in the old elites’ interest (his clientele when it comes to voting). On the other hand, in China, we have a government of old people acting first of all for the greater benefit of the Chinese youth.
As a result, China will never Westernize (remember, their model of society is Singapore, not New York, London or Berlin), but instead it will modernize.
AK: As early as 1944, Charles de Gaulle introduced a dirigiste economic policy, which included substantial state-directed control over a capitalist economy, which was followed by 30 years of unprecedented growth, known as the Trente Glorieuses. On that note, can we assume that President Xi Jinping wants to go down in history as the man of the “Thirty Glorious Years” – after the “Thirty Pitiful Years” under Mao Zedong and the “Thirty Needy Years’ under Deng Xiaoping?
DB: China tends to think in 30-year cycles. The communist era (1949-1978) was followed by reopening to the world (1978-2008). The next period should stretch to 2049, marking the 100th anniversary of Mao’s coming to power.
Having obtained the ability to stay in power for more than two mandates, President Xi Jinping immediately issued the equivalent of a “15-year profit-warning,” delaying the objective of a “Prosperous China” to the 2035-2049 period, promising first a more painful intermediary period of “Modern China” between 2020 and 2035.
Therefore, in the next 15 years, we should expect to see more political tightening in order to accelerate the necessary economic reforms that have been delayed due to the great financial crisis of 2008.
AK: It is said that Chinese cohesion is built on an ultra-positive patriotism that still does not exclude the globalization of the 21st century. What should Europe make out of this?
DB: The danger the West is potentially facing is to see Chinese patriotism turning into nationalism. As we know, patriotism is when you love your country, but nationalism is when you hate other countries. It is Europe’s duty to remind China of its history: Every time it has closed itself to the outside world, it has declined.
When China still has 600 million people living with $150 a month, at a time it needs to avoid the “middle income trap,” to foster the rise of nationalism – instead of patriotism – is the biggest mistake Chinese leadership can make.
AK: Some argue that with the huge success of live streaming and its unique business model with “Chinese characteristics,” Beijing is aiming to modernize itself without Westernizing. This, in part, is the result of the new sociology of Chinese youth – something that was skillfully noticed by the Chinese government, which sees the digitization of these new services as new triggers of productivity to avoid the “middle-income trap.” What are your thoughts on this?
DB: China’s leadership is not only bright, it seems to be lucky as well. Traditionally, the “middle-income trap” emerges when, at $10,000 GDP per head, an economy moves from manufacturing to services. Given the initial lower productivity of services – as people require far more training and processes take longer to be put in place – the productivity levels off while salaries increase, and the economy collapses.
Only a few exceptions like South Korea, Taiwan, Singapore or Hong Kong have managed to avoid the trap. The luck of China is that this transition from manufacturing to services takes place at the same time as the digital revolution, which allows services to scale up in a productive manner at unprecedented speed.
Hence there is the opportunity for China – having been the “workshop of the world,” then the “R&D lab of the world” – to become the “butler of the world,” offering (thanks to artificial intelligence) a targeted customized service at a mass-market cost.
AK: According to the latest report published by McKinsey & Company, Chinese consumers are said to be the “growth engine of the world.” On that note, what should we know about the average Chinese consumer? How can European business respond to their growing expectations, and deep pockets?
DB: Do not make the mistake of extrapolating Western trends into China. In my opinion, there is not going to be a Western-type “middle class” in China.
The “middle class” concept was invented in the US in the second half of the 20th century, referring to a family with two kids, two cars, living in a 2,400-square-foot detached house. A young Chinese today is a one-child, his parents look like grandparents who are not digital-native, and they live in a 500-square-foot block apartment in a 40-floor tower.
The best opportunity for European consumer-oriented companies lies therefore not so much in the “middle class” segment, but more in the 150-200 million upper-affluent Chinese, ie, 10% of the population. And especially the youth, whose disposable income is twice as high as in the West, as their families have already paid for their accommodation and they do not want a car any more.
Hence, that’s why we can see the amazing success of European lifestyle companies attracting this disproportionate disposable income.
AK: While many in the West still insist on describing China as a “communist country,” some China-watchers may argue that traditional tensions within the Communist Party, between conservatives and reformers, have been giving way to a new ménage à trois, which seems to be heavily inspired by Joseph Schumpter’s economic ideology. What is your take on this? What nees to be done in order to abandon classic categorizations and see political reality in China as it is?
DB: Quite contrary to Western perception, the Communist Party has never been monolithic, traditionally consisting of two conflicting factions: on the one hand, the “Communist Youth” – made up of traditionalists, proponents of state intervention, strong in Beijing – and on the other hand, the “Reformists” – proponents of reform through the private sector, strong in Shanghai.
President Xi has contributed in his own way to complicating the picture, relying principally on his “princelings” friends – the children of Mao’s advisers before the Cultural Revolution. Today this is illustrated by the slogan of the month called “dual circulation,” which claims to combine the rise of domestic consumption and the openness to the outside world.
In reality, it translates the ongoing fight between the proponents of the closing-up of the country to the outside world and the proponents of the comeback of China to the world stage, stressing how much China is still dependent on the outside world for its development.
AK: What else should we know about China in the West and what is the best way to increase our awareness?
DB: The most striking comparison to me remains in the fact that there are only 600,000 Westerners living in mainland China, while China has 70 million diaspora members in the West. The West is therefore at a 1:100 disadvantage when it comes to information. If we agree that the 21st century is all about mastering information, you’ll understand the need for a wake-up call in the West.
AK: You are arguing that the “Greater Bay Area” – a special economic area grouping together Guangdong province, Hong Kong and Macau – is destined to become the “21st-century California.” Should Europe be involved in this project? How could the “Old Continent” add value to make the plan work and make it win-win for China and itself?
DB: If I was 20 years old, I would relocate to the Greater Bay Area, which seems to be one of the most – if not the most – promising areas in the world for the next 10 years. Eighty million people in the Guangdong region (including Hong Kong and Macau) target to build the equivalent of Germany (GDP of $50,000 per head) thanks to the combination of hardware and software to implement the forthcoming artificial-intelligence revolution.
China has the hardware, Europe has the industrial software. Let us combine the two.
