Is China’s economy on the rebound?

Ben Bland

Hi, good evening everyone joining us here in the room and online, as well, in this hybrid world that we now inhabit. My name is Ben Bland. I’m the Director of the Asia-Pacific Programme here at Chatham House. And I’m delighted to see you all, and to not see you all, online, but you can see me, for this discussion on China’s economy, where it stands post the reopening, following three years in which China has been closed to the world due to the pandemic and the harsh COVID zero restrictions that have been in place.

Delighted to be joined by a really top-notch panel of experts to, kind of, make sense of where China’s economy is. Is there actually a rebound at the moment, what kind of rebound, what are the short-term and longer-term challenges, and what does this intensifying geoeconomic and geopolitical competition between the West and China mean for China’s economy and for all our economies?

So, sitting next to me here, we’re lucky to have Sarah Hewin, who is the Head of Research for Europe and Americas for Standard Chartered Bank, and next to her, of course, we have Dr Yu Jie, who is a Senior Research Fellow for China here at Chatham House, and joining us online from Washington D.C. is Tianlei Huang, who is a Research Fellow at the Peterson Institute for International Economics. So, thanks for joining us here and thanks to you all.

We will be talking onstage for about 35/40 minutes, and then we’ll open up to questions from the floor here in the room, and online. If you’re online and you have questions, please put them in the Q&A function on Zoom and I will read them out later on. But put your thinking caps on, you’ve got a bit of time to come up with some tough questions for our panellists.

Let’s just get straight into the meat of the subject, Sarah, I’m going to come to you and just ask to digest a little bit for us what the latest economic data coming out of China tells us about the state of the economy and this rebound, or not.

Sarah Hewin

Well, we’re still waiting for the first quarter GDP data, which we get in about – just under a couple of weeks’ time, but the high frequency data that we see, and the data for January and February, suggests that there is an upswing. We’ve seen quite a reasonable pick-up in industrial production. If we look at surveys of manufacturing and services, then, there’s been a rebound there, as well, well, you know, quite a strong rebound. And, you know, after growth of, well, flat, zero GDP in the fourth quarter of last year, we think that we’ll see quite a good rebound in the first quarter. Year on year we may be as high as 4.9% for Q1, which is a – we’ve, sort of, recently revised up our expectation for the quarter, given some of the data that we’ve had more recently.

So, I think that we are starting to see signs of the impact of the reopening, normalise – move to a normalisation. Some areas, obviously, are not looking so strong, and in particular, exports are still relatively weak. So, that’s, sort of, one – the – with the recovery that we’re seeing so far it seems to be domestic demand driven, rather than export led.

Ben Bland

Okay, and where in particular are you seeing those signs of strength, what sectors or what parts of the economy?

Sarah Hewin

Yeah, so we’ve seen a pick-up in auto production, for example, on the manufacturing side, on the services side, as you would expect a recovery in hospitality, a pick-up in retail sales as well, and travel/transportation. So, in a sense, we, sort of, know the playbook. If we look at the experience that we had in the UK, across Europe, in the US, when pandemic restrictions were lifted, then we saw these isolated, sort of, you know, face-to-face type of activities increasing and travel and transport recovering, as well. So, those are the areas that we’ve seen a – interestingly, as well we do have some hints of housing sales recovering as well, which has obviously been one area that’s been very subdued, very weak, but the data are suggesting that there’s something of a pick-up there.

Ben Bland

Yeah, I’m sure we’ll get onto the property sector shortly. Yu Jie, I want to come to you next. So, we’ve, sort of, heard a bit about the picture now. I want to understand a bit more about how that tallies with the, kind of, messaging that’s been coming out of the Communist Party and the Chinese Government. Obviously, we’ve had the, kind of, five-yearly Party Congress and Xi Jinping’s got his next term, then we had the Two Sessions, the lianghui, recently where, you know, there were some more, kind of, updates about changes in the government. So, what messages have you been picking up out of these big, kind of, showpiece political events about the direction the economy might be moving in, and at least what the party and the government want to see in the economy?

Dr Yu Jie

Right, okay. Good evening, ladies and gentlemen. I’m delighted to see many of you return to Chatham House. Thank you, Ben. Three things I picked up in here. Firstly, this is now the economy that is not only about growth, not only about double-digit GDP that China has produced in the last 50 years or so, but instead, I think Xi Jinping really putting the heart of – in terms of security and economic development should really go hands-in-hands. So, that, really, the notion of financial stability, the notion of that property sector perhaps will not having a negative spill-over effect towards other wider economy, would really have been at the heart of this political messaging from the Chinese leadership.

Now, second very interesting element I picked up is on this gigantic government overhaul that for those of you who have followed China, that realise the government seems to have that, sort of, overhaul – certain department has been cut, the entire civil service has reduced around 5%. So, again, there’s some significant salary reductions in there, and particularly for the banking sector, and I think Xi Jinping and Li Qiang made it very clear that they would not necessarily want to have the financial industry that’s thriving and hence, could potentially producing some gaps in the cracks, and that perhaps will not leading into some, kind of, economic collapsing of China. So, I think that notion of security has come up very strong for Xi Jinping third term.

Now, lastly in here, is that while we’re talking about property sector, while we’re talking about reviving the Chinese economy, but I think really what the government want to do is they’re channelling most of the money in the property sector into the hi-tech sector. Essentially this is the government who prepare its own economic survival. This is the government that has to prepare the worst yet to come on the competition with United States, hence again, the idea of a security, the ideas of having Scientists sit in Cabinet seems to be more important than having the Financial and Economic Planners sitting in the Cabinet in the Politburo, as we had in the past. So, I think those three things seems to be very unusual, compared with any of the previous government, compared with any of the previous National People’s Congress, yeah.

Ben Bland

Thanks, Yu Jie, and Tianlei, I know that you do a lot of work on the private sector in China, I guess much maligned recently by some key people in the party. What, sort of, signals are you picking up from Chinese businesses, foreign investors in China, about, you know, their confidence in the economic outlook? Because presumably, they’re going to have to play a pretty important role if this, kind of, initial bounce-back that we’ve seen is going to be sustained.

Tianlei Huang

Well – oh, well, first of all, thank you Ben and Dr Yu Jie for having me. I’m very glad to be with you today. Well, we know that private economic activity in China has remained very weak in the past couple of years because of not only zero-COVID, but also the repeated government’s crackdown on private businesses, and the government policies that favour state companies. We follow investment data quite closely and if we look at the latest data on investments, we see that, actually, the gap between the pace of private-led and state-led investment through February, actually further widened, the gap is even bigger than last year.

So, it seems the wound in the private sector is probably much deeper and wider than many people initially thought. You see Chinese officials have been making lots of promises lately to try to reassure private entrepreneurs, but so far, we have not seen any real progress in terms of the private economy recovering. I believe more concrete actions will be needed. Lip service itself is not going to restore confidence.

Ben Bland

Thanks, Tianlei. I mean, on that point, Yu Jie, I might ask you a bit – to dig a bit more deeply here, because there is a lot of mixed messages coming out of the Chinese leadership. You know, on the one hand, there are these messages about self-reliance and economic security. On the other hand, at the China Development Forum we recently hear the, sort of – yeah, the same old noises of actually, “We welc – open our arms to foreign investors,” etc., but what’s, yeah, what’s more important of these mixed messages? What is actually, kind of, the driving motive and how far is there a tension between, kind of, the need for growth on the one hand, and the desire for security in this uncertain world on the other?

Dr Yu Jie

Well, I mean, absolutely agree with Tianlei just saying regarding this – these matters more than words for the Chinese Government nowadays. I mean, we hear many noise, some come from the new Premier, and also from the China Development Forum in thinking that China’s open for business and here and there. But I think for – really for the short term let’s look into this, that the Chinese Government definitely do have interest of revitalising the private economy, the reason is unemployment.

Now, the reason we are talking about the 5% GDP growth, and for me, that is quite a modest target, but really the monumental task, the mountainous task for this government, is really about job creation. We’re just including 12 million fresh graduate job, which is around 20% of the British entire population, so that is a new job creation that the government require to do, and where are those jobs have to come from? Mostly will have to come from the private sector. Now, judging from the past experience, that most of the private companies make up around 80 – 60 – sorry, around 60% of the total employment of China.

So, again, if the government want to have the economic back on track, they will have to be friends with the private entrepreneurs. So, that’s the reason why saying – Li Qiang said recently, “The private entrepreneurs of China is a part of a family, but in terms of part of a family, do you want only to be someone that you cherish, or do you want to have your family members being the black sheep?” So, I guess I think it’s really the former that wanting something to be cherished in the shorter term, so that’s about economic rebound.

Now, the second element I think is obviously, come to the longer point regarding the economic survival picture I said, regarding the security. I think overall it’s that Xi Jinping would also hope that the private enterprises would be in-line with longer term development target of the country, which is mostly spending money on the basic scientific research. So, it’s not about fintech, it is not about cryptocurrency. It’s about how China will be able to devise the basic research that’d be able to make up the gap that China still remains to have between China and United States.

Ben Bland

And Sarah, I mean, I wonder what you hear from your clients. You talk to a lot of, you know, international companies who are following China, who are doing business in China, are keen to do business in China. What’s their, sort of, sense about this direction of travel and the openness, or the degree of openness to foreign investment into the private sector? How much is that a concern, and what sort of things would they want to see, you know, to convince people that this isn’t just, sort of, warm words, that there is some, sort of, substantive reopening and a desire to, kind of, open new doors to foreign investors?

Sarah Hewin

Yes, I mean I think that there’s an acknowledgement that is – that it has been a relatively difficult time in recent years, pandemic and the, sort of, property crisis, and the, I suppose, less friendly sentiment towards the private sector. But the – clearly there has been a sort of, turnaround and the government, sort of, making overtures to, you know, the West and to private businesses, as well. But, yes, I mean as our colleagues have said, it’s more important to have some follow through. It’s not just enough to have the warm words, and I think that there’s an element of mistrust that, you know, will only turn around in time.

I mean, taking a step back, of course, there is very, very supportive policy. So, we’ve got a sort of, big fiscal stimulus which is in place, which was in place last year as well, but you now have the right conditions for that to gain traction. Credit is cheap and for foreign businesses, they want to also, sort of, see the local demand, and that, we think, is coming back very strongly. But I think there’s still more that needs to be done to convince some businesses, you know, particularly in terms of, sort of, adding more investment in, and at the same time, as I say, it’s a market that absolutely cannot be ignored. So, for many businesses, you know, very pragmatically, it’s a question of, you know, planning for the next five/ten/15 years, and that inevitably will require investment.

I suppose what we have seen, as well, is that businesses are not divesting out of China, but where they’re increasing investment, it’s in China, but also in – you know, across the region, partly for issues of cost, as well, because costs have risen in China and there are, sort of, cheaper, you know, alternatives in the region.

Ben Bland

I mean, and in terms of, kind of, what foreign investors want, are there specific reforms or specific things they would like to see to give them confidence? Like, do you have a sense of what it would take to convince people from the outside world?

Sarah Hewin

I mean, I think it is very much a sort of, top-down thing. So, rather than specific regulations, because it’s the sentiment behind and the, I suppose the, sort of, softer aspect of business rather than the, you know, specific rules and regulations that have been put in place. And so, as I said, overtures are, you know, becoming friendlier again and more supportive, more private sector leaning, and I think that that’s – you know, as long as that remains the case, then gradually, businesses will recover. I mean, it has been such a, sort of, period of disruption that, you know, we’re looking for some normalisation.

Ben Bland

And Tianlei, I wonder if I can come to you a bit on a similar question in terms of the Chinese private sector. I mean, we’ve seen these, kind of, rolling crackdowns over the last, what, nearly ten years, since Xi Jinping came to power, across many different, sort of, parts of the Chinese private economy, as well as the state and economy. But what, yeah, what would it take for Chinese private investors to have more confidence to feel that these somewhat arbitrary, at times, sort of, crackdowns are coming to an end? It’s, like, what would actually give them the confidence to move forward? I mean, do you think things like the breakup of Alibaba, is that a signal that we’re coming to the end, that the worst is over, or does that, sort of, tell people in the private sector that there’s even more meddling coming down the tracks?

Tianlei Huang

Well, I think one of the contributing factors that led to the issue of lack of confidence among private entrepreneurs and investors is this greatly enhanced role of the state in economic affairs in general, including in the private sector. If I’m a private entrepreneurs, I would worry that my business may be, you know, crackdown by a document overnight, coming from Beijing. I worry that my assets may be taken over by the states without giving me any legitimate reasons, right? And relatedly, this enhanced role of the party state in economic affairs and in the private sector leads to a great deal of uncertainty in terms of policy. There’s not much predictability in policymaking in the last – especially in the last couple of years, right? So, I think it really – the state really needs to somewhat withdraw from the private sector, from economic affairs, that’s fundamental. That would give private entrepreneurs more confidence.

Ben Bland

Thanks, Tianlei, and obviously there have been, as you were saying, many, kind of, self-inflicted wounds, if you like, from the Chinese Government, but one, sort of, other factor externally, of course, recently, is the export controls we’ve seen from the US increasing, restrictions on inbound investment in the US, UK, other parts of Europe, not formally targeted at China, but in practice targeted chiefly at Chinese investments. Yu Jie, I might come to you on this. I mean, how far do you think these restrictions on exports of semiconductors and other, sort of, high technology goods to China, and limits on Chinese companies’ abilities to acquire technology and partner with universities and others overseas, how much is that going to stymie China’s medium and long-term growth prospects, do you think?

Dr Yu Jie

Well, I think this is quite damaging and quite disruptive to say, at least. Surely, we still acknowledge that there’s some substantial gaps in terms of technology innovation between China and United States, in the past, that the country has been really relying upon the connectivity with the rest of the world, having the free flow of talents to be able to visit the country and go to United States and go to other part of the world to learn the technologies and then bring back to China. But what we have right now is that most of the advanced economies have already or began to closing that door. So, part of the really bigger strategy for Xi Jinping is really to – whether he will be able to grooming a home – a generation of homegrown talents.

I mean, so far, China’s doing okay. I think part of the reason this is also being pushed by Donald Trump, by the President, because of the so-called China Initiative introduced in the United States, and that really raising a lot of fear across American and Asian academic community and has led into the generation of certain numbers of China Scientists return to China. But I think at the end of the day, connectivity remain as being a keyword in terms of innovation, so what if ultimately, those Scientists have run out their talents and they could not really update their knowledge? And then for that very moment, I think over medium term in the next five years would be quite challenging for China. So, even we’re doing quite good for now because of all these returnees, but that in five years’ time, as the technology upgrade, and then whether China will be able to learn the latest. So, I think it’s really – so far let’s – the jury’s out, and we wasn’t quite sure how this so-called self-reliance would be able to work for the moment.

And also, very interestingly, I mean, we spoke earlier this today, that many of the notable Scientists have now taken a position in the Chinese Politburo, and universally, every single of them have a very substantial experience by either studying abroad, or doing a visiting fellowship abroad. By the way, I’m doing a long paper for that, so that’s why I’m just downloading my finding this afternoon. So, that’s the part of the reason, is the connectivity. I think once China lost that connectivity it’s something deeply worrying.

Ben Bland

Again, I mean, what’s your take there, Sarah? ‘Cause it does seem to me that, you know, China’s growth story was largely driven by the party and the state getting out of the way, allowing private individuals and businesses to trade and do business, and also by China’s, sort of, connections with the world, which allowed people to acquire knowledge, know-how and relationships, and also to, kind of, open up those access for trade and investment to flow both ways. So, when you think about the world we’re in now of rising protectionism, obviously, yeah, in China in the last few years, but now, kind of, being mirrored in Europe, in the US and elsewhere, I mean does that make you worry about the outlook, not just for China’s growth, but in a way, for all of us?

Sarah Hewin

I mean, I think it is very damaging, yes, to the extent that we see more protectionism, a move away from globalisation. At the same time, we have to remember how big, still, the trade flows are between Europe, China, the US, and it’s – you know, we are absolutely not talking about a complete – you know, a, sort of, decoupling of the economies, that’s not something that’s going to happen.

I think another feature as well is, you know, the – which you mentioned, is the, you know, number of graduates in China coming to the labour market, STEM-trained graduates. In the right conditions, with a, sort of, entrepreneurial private sector, then there’s a, sort of, huge momentum there and a huge drive and – you know, that could be achieved in terms of improving productivity.

So, it is very much – I mean I think you have a lot of very positive factors there, as long as the, sort of, conditions are right, and of course it’s an imperative, given the demographic trends that we see over the next few decades in China, that productivity does increase. You can do a lot more with a shrinking population.

Dr Yu Jie

I mean, one which I worry quite a lot is the sense of brain-drain from the private sector into public sector in China, because in the past, the – many of the young people they generally would choose companies like Baidu, Alibaba, because for, you know, quite nice working environments and also, plus, some good salaries. But however, given the private sector has really enter into period of certain volatility, so all they’re looking for, for Chinese young people, is they’re looking for stability, they’re looking for certainty, and where were they turning to? They were turning to civil service exam. So, I think probably in China they employed perhaps the largest number of Civil Servants in the world, and perhaps was the highest qualification in terms of education background, and the reason is because they’re looking for certainty, and that means that ultimately, the private sector labour force in terms of brain-drain were shrinking, quite significantly.

Ben Bland

I just want to come back to this question of China’s, sort of, connectivity with, I guess, the Western or advanced economies, ‘cause as you said, like, trade is still quite – going quite well, but I wonder about outbound investment from China into Europe, the UK and the US with all these new restrictions we’ve had. Obviously, they’re meant to be targeted at certain sectors that are important to national security, but aside from the fact that there’s not that much transparency about how these things work, you would imagine it’s quite a deterrent to other Chinese investors, even in non-sensitive sectors. So, do you have sense, Sarah, of, kind of, what the outlook is for Chinese investment?

‘Cause just thinking back five or ten years, it seems like an age, but, you know, in all – in Europe, in the UK, in Australia, in the US, sort of, every city Mayor, every owner of a business, you know, with turnover of more than £10 million a year was hoping to sell their company or sell their real estate to Chinese investors and it was a really big source of growth and dynamism in our economies. But do we think that will ever come back, or is that ‘golden era’, as it was called here, is that, sort of, gone for good with these new restrictions in place? And, you know, it is, basically, a hostile environment that’s quite deliberately been created to deter Chinese investment.

Sarah Hewin

I mean, it’s clear that there are certain sectors that are becoming less welcoming, put it that way, to Chinese investment, but it’s far from a blanket ban. So, I think – and really, for, you know, for Brussels, for, you know, D.C., I think particularly for the Europeans, there’s a bit of a, sort of, tussle about exactly, you know, what approach you take. And we know that you have, you know, from an individual country side, Germany for example, that is perhaps, you know, wanting to be more open, wanting to make sure that there’s – that we don’t see trade disrupted in such a, sort of, massive way, and equally, that investment also – those investment channels stay open.

Now, I mean, it’s clear that we’re not going to – I mean, to me it seems likely that we’re just not going to get back to the very open and very, sort of, large-scale flows of investment that we’d seen previously, but that’s not to say that there isn’t scope for continuing investment in large parts of European economies, albeit with certain sectors probably now becoming off limits.

Ben Bland

Tianlei, I want to come to you next on the property sector, which we mentioned earlier and it’s obviously one of the key, you know, medium-term or long-term challenges that China’s facing. The large debts accumulated there among the big Developers, you know, the question of how local governments are going to fund themselves if they can’t keep selling land to developers. I mean, this is one of those problems we’ve heard about for many, many years and it always seems to be, sort of, on the verge of collapse, but never quite happens. I don’t know if that’s the hyperbole of the reporting and the analysis, or something else, but what’s your sense on how the property sector’s been im – affected by the pandemic, and the outlook going forward for China’s property sector?

Tianlei Huang

Sure. So, there are signs that the property slump is now easing, like Sarah just described. Property investment and sales are still in negative territory, but by much smaller amounts, through February compared with last year. So, it seems the government’s rescue package is indeed working. By the way, the government’s rescue package is mostly about providing greater liquidity support and restoring financing channels for troubled Real Estate Developers.

This, of course, risks further encouraging moral hazards and risky behaviours of both developers and speculators, but we see that this – using language what Dr Yu Jie just said, you see that the leadership is now focusing on the short-term stabilisation of the economy, making sure that economy does get back on track. And at the same time, they’re putting some longer-term structural concerns, including the debt issue, which I would argue is simply a problem on the surface – in the real estate sector there are some other deep-rooted causes, problems in the real estate sector, that Beijing has barely touched.

So, you see, they are making this compromise, but they can’t afford to wait too long to address those deep-rooted structural problems, including what you said about the problems in local government finances, their heavy reliance on land revenue, not only land sale, but also lands and property related taxes. And property tax as we know, is a viable option. People have been debating about the possibility of property tax for a long time, but because of many constraints, both in short-term and long-term, it has been repeatedly postponed, but we have to admit property tax is not a panacea. It’s not going to solve other problems in the property sector. Other, more sustainable sources of revenue, are also needed, also need to be explored for local governments if they want local governments – if they want the local coffers to be more sustainable over the long-term.

Ben Bland

Thanks, and I want to think a bit more about the long-term. I mean, when people look at the key challenges China’s facing, they think of the ageing, shrinking workforce, you know, problems with decelerating productivity growth, which aren’t unique to China but are a problem for China, as well as, you know, the struggles with shifting away from this capital-intensive growth model, which was really successful in the past. And again, I think the party and the government have been talking about this shift for a long time and it doesn’t seem to be happening. So, yeah, Sarah, what’s your sense of the long-term outlook, not thinking about, sort of, this year or this quarter, but ten, 20 years down the line, are we just looking at a China that’s, basically, coming to the end of its, sort of, period of really rapid growth?

Some of my former colleagues at the Lowy Institute did some work last year and they predicted that China’s long-term, sort of, GDP trajectory for growth is going to fall to 3% a year by 2030, 2% by 2040, and yeah, they would argu – they argued this is, kind of, a natural process, right, for a really big emerging economy that’s growing really fast and is, basically, going to be burning out. Is that your sense of where things are heading in the next ten or 20 years, as well, or do you have a kind of, more optimistic picture for how the authorities might be able to tackle some of these long-term challenges?

Sarah Hewin

Yeah, I mean, I think it’s probably important to, sort of, separate out the annual growth rates, the outlook for growth rates and the longer-term future. I mean, as the population shrinks, then naturally, there will be a slowdown. You know, if we go back, we can remember times of, sort of, double-digit growth year on year, 8%, seven/8% was the norm. Now we’re looking at 5% and we think, sort of, a bit more than 5% this year, but probably over the next few years 5% and then slowing to 4% and lower. But the – I think the big question is, you know, in capital terms, is wealth going to rise? And I think that there are, you know, plenty of opportunities for that to happen.

I mean, one of the areas that we haven’t discussed, of course, is, sort of, you know, the climate-related green investment in technology, which, you know, has already gone quite a long way in China, I think has got quite a long way to go, and it’s perhaps one area where there is scope for co-operation between – you know, with Europe and the US, as well. So, the – and, you know, the, sort of, emphasis on improving human capital is highly significant. If we look at economies where the long-term outlook is less encouraging it’s where, you know, the human potential is just not being, you know, utilised to its full – or there’s not the, sort of, education and training that’s in place to improve outputs from individuals.

So, yeah, I would say, sort of, get away from the, sort of, the headline numbers on GDP and look at what’s happening GDP per capita and the environment in which you can really sustain a stronger productivity growth.

Ben Bland

And on that point, Yu Jie, I mean of course, yeah, the long-term health of any economy is not just about high GDP, but more equitable growth, creating – training people, giving them opportunities, and China obviously suffers, like a lot of large emerging economies, some huge inequalities. I mean, Xi Jinping has talked about or implied, you might look to address this, you were talking about common prosperity and the like, I mean have we seen anything out of all these different policy documents and personnel shifts over the last few months that gives any indication of what the party and the state is actually going to do to try and reduce inequality in China and ensure there’s more even growth?

Dr Yu Jie

Well, I think it’s – again, there’s a quite mixed message in here. I mean, we had two events in the last six months, so the 20th Party Congress, of course we have seen quite a clear interpretation of what Xi Jinping wants regarding common prosperity, essentially, is to close the income gap between the coastal provinces vis-à-vis the inland provinces. That was very clear for the Party Congress, but however, I think because the current state of the Chinese economy and hence, the ideas of having economic growth somehow become a more renewed impetus, become more important, than just so-called common prosperity, and also, by the talk of common prosperity that has already ruffled quite a few feathers among the private entrepreneurs.

So, I think that’s a part of the reason why the Premier Li Qiang in time of the press conference, and he did not even mention the term common prosperity at all. I mean, I remember two years ago many of the Investment Bankers even asked me, “How do we interpretate common prosperity?” I said, “Just be prepared. Many of your clients won’t keep the money for you because Xi Jinping want to have a Robin Hood approach.” But nowadays it seems to be that term has been temporarily, let’s put in this word, temporarily been removed, but we’ll nev – we’re not quite sure when that term will be – come back.

And I’m pretty sure that will come back because we have to bear in mind that two third of the Chinese population are largely rural, and these two third of population are essentially the core supporters for the regime, and also for Xi Jinping himself. So, I think whatever he do or say, to guarantee a regime security and legitimacy, he will have to satisfy the majority of the population, yeah.

Ben Bland

And I’m going to come to questions from the audience in one sec, but one last question, Yu Jie, for you actually, talking about terms that’ve been dropped, what’s happened to the Belt and Road Initiative about which we heard so much for so long, and now we don’t seem to hear so much about it, but these other new initiatives, the Global Development Initiative, the Global Security Initiative, the Global Civilisation Initiative, what’s happened to the BRI?

Dr Yu Jie

Well, I mean, every day – when you become a China person, you have, like, all these vocabularies to learn. So, BRI I’ve learned in the past eight years, and now have to learnt all – this whole range of new ca – vocabulary beginning with a G. So, GDI and GSI and the…

Ben Bland

GCI.

Dr Yu Jie

…GCI, as well. Now, regarding BRI, I think the line has always been very clear, and I think that line has been quite clear ever since April 2019, the Second Belt and Road Forum, that the Chinese Government did not pledge a single fresh capital ever since 2019, because the government realised the way how they operate the BRI in the past is simply just not very sustainable financially, as well as environmentally. So, I think Beijing has really learned the mistakes in the past and tried to finetuning or putting this word, recalibrate the BRI, that is to say, letting whoever, the companies or provincial governments that has already participated with BRI projects in the past, to finish off the projects, but not investing anything new.

So, that is just one element, and very clear shift, really, come from – if any of you will go back to the 20th Party Congress report on page eight, the section. Sorry, a little bit nerdy in here, and there was very clear mention by saying, “The BRI from now on would be a trade promotion platform for the Chinese companies, for the Chinese Provincial Government.” So, that’s where we are. The government has offered a very clear answer. Now, on the GDI and on GSI, it’s essentially – it’s a diplomatic narrative that China’s very keen to present, and that diplomatic narrative which is quite different from the so-called liberal international order, yeah.

Ben Bland

Right, well, yeah, happy to take questions now, so just stick your hand up and we’ll – tell us who you are. We’ll bring a mic to you and ask your question. Yeah, one here at the front.

Member

Hi, my name is Jay [inaudible – 40:24] and I’m a Legal Advisor. So, I have two questions, the first one is of clarification. When we say the Chinese economy has opened, opened for who? I just want to clarify that. Is that the Han Chinese population that’s government-affiliated, or does that also include non-Han Chinese people, open for trade?

And the second one, I think one of the questions was in terms of reforms and regulations, what could private companies be looking at for reassurance? Recently, the US – well, not recently, the previous year, the US Government passed the Uyghur Labor Prevention Act, or otherwise known as Uyghur, which essentially bans companies from importing goods made with Uyghur forced labour. Given forced labour is an emerging issue from China, I do wonder if the Chinese Government is being more, or looking to be more transparent in this area, or give – is looking to provide more reassurance to provide – private investors. Thank you, and it could be anyone who answers this, thank you.

Ben Bland

Okay, thanks. Tianlei, I might – I mean, given you’re in the US, there are these new restrictions, is that something you can answer for us?

Tianlei Huang

I think those are great questions, but hard to answer. I think there’s very little transparency as to what the Chinese Government is doing in response to these foreign concerns, legitimate foreign concerns on forced labour and human rights. I think there – like, I’ve read somewhere that, you know, they’re asking companies’ Executives to come to Xinjiang and see how factories there – how production works in the region, but that obviously has not resolved the concerns of many foreign companies. I guess we’ll have to keep an eye on how things are evolving on the ground there. Sorry, I don’t – I can’t give a very clear answer on that one. Perhaps Dr Yu knows more.

Dr Yu Jie

Hmmm. Well, I mean, speaking of the forced labour, I think recently Beijing has signed a so-called – the eight treaties with the International Labor Organization, and that was part of the conditions supposed to deal with this – your question, but I mean I did not really follow in details. And I think part of the reason why the investment treaty agreement with European Union has been shelved is precisely because of that issue, so let’s see. Perhaps we may have some creative solution come up after tomorrow that Macron and von der Leyen would have a discussion with Xi Jinping on that, yeah.

Ben Bland

Yeah, I mean on that, we have a question online about the trip, from Hugh Ahern, saying, “What do the speakers make of the French EU delegation visit to China?”

Sarah Hewin

I think it’s – I mean, as I said earlier, I think it’s really Europe trying to differentiate itself from the US, which they seem to be taking a more hostile stance. But, you know, obviously we have, sort of, Macron on one side and other leaders from other countries perhaps taking a slightly, sort of, different position. So, to me, I mean, it’s positive, it’s, you know, keeping the dialogue open, and I think, you know, we should, sort of, take it at face value, really.

Ben Bland

Okay. Yeah, we have a question here, the gentleman in the grey hoodie.

Xin Dung

Hi, I’m Xin Dung, a student from China. I have two questions. One is, we didn’t hear much from this talk yet is about one of the challenges facing China’s economy is crumbling local government debt and the diminishing returns on government investment on infrastructures. I want to know more about this. Second question is, last week, he – European Commission President said, “It’s not decoupling, it’s de-risking,” but to what end does the de-risking ends? We now think about it in terms of, like, hi-tech, today it is Huawei or TikTok, or nuclear plant in UK, I don’t know how it happens. Tomorrow it might be electric vehicles for privacy reasons, or medical supplies because of pandemic, but what about tomorrow or the day after tomorrow, where will it end? Thank you.

Ben Bland

Okay. Maybe Yu Jie, I’ll come to you on, like, de-risking, where does de-risking end? And then…

Dr Yu Jie

Okay.

Ben Bland

…Tianlei, you can start thinking and we’ll come to you to answer the very simple question about local government debt and – crumbling local government debt and infrastructure, after that.

Dr Yu Jie

Well, de-risking seems to be a very polite way to say, we don’t want your investment, and we want to – looking for somewhere else. I mean, let’s just be very frank here. I think this seems to be in – really in the mindset of many of the European companies, and this is talking about, “Yes, the strategy, we’re still interested in investing in China, but we’re also interesting somewhere else, as well,” so that, sort of, China Plus One strategy, that seems to be really in the mindset of the European – both corporate groups, and also for the Politicians.

Now, I think the difficulties coming here, it is not because it’s something to do between China and Europe, but the difficulty in here is on China’s choice, and China’s pro-Russia neutrality on Russia’s invasion towards Ukraine. And I think that’s really – have further strained this existing relationship between China and Europe and then, as many European companies naturally were taking the lessons from overreliance towards Russia, and hence, now we have just to do some scenario planning for the sense that perhaps they cannot over-rely on China.

Now, the trick – the difficulties in here is that Russia is a very much one-dimension economy that it’s easy to withdraw, but China’s a multi-dimensional economy that the scale and the infrastructure in place, it seems to be, when we’re talking about decoupling, it’ll be quite a messy business.

Ben Bland

And Tianlei, on local government debts.

Tianlei Huang

Yes, sure. So, I believe one of the long-term goals of the institutional restructuring coming out of the Two Sessions last month was to reduce conflicts in the mission of local governments that have long been tarred with the due responsibility of promoting growth, yet at the same time acting as watchdogs against local financial risks. And one of the best example of the local financial risks as a result of this conflicting mission is the very issue of local debt. So, by restructuring the party state’s apparatus, I believe a long-term goal is to deal with these risky points in the economy. But if we look at the short term, again, you see that the government is trying – is now focusing on the short term, on the stabilisation of the economy. In practice it means providing more liquidity spos – support for those local firms that are probably facing troubles in repaying their debt obligations this year or next year.

On the over in – on investment, the diminishing returns on investment, government risk – investment in infrastructure, well, this obviously – we discussed productivity. Obviously, one of the factors leading to a decline in productivity in the Chinese economy is this long overinvestment in not only infrastructure, but also housing, especially in lower-tier cities. The issue of resource misallocation we just discussed, right? Obviously, it’s not good news for productivity over the long-term. Yes.

Ben Bland

Thanks. Yeah, I’ll get a question over that side.

Martin O’Neil

[Pause] Hi, I’m Martin O’Neil. I’m a member of Chatham House. I was fascinated by the conversation about, sort of, shifting to more high technology development and China becoming, sort of, almost more self-sufficient in that arena. Two topics that to me would be related but weren’t mentioned, one, intellectual property and protections of intellectual property, and second, capital account convertibility. Can you realistically develop a hi-tech, self-sustaining economy without those elements, and then, has there been any hint that the government’s even thinking of doing something in those directions?

Ben Bland

Yeah, Sarah, do you want to have a go of that? We heard a lot about the international of the R – internationalisation of the RMB for a long time, and now we hear very little about it.

Sarah Hewin

I mean, absolutely, there’s – that’s what I was going to say, we had an RMB Internationalisation Index that we ran for a while, which, you know, was on a rising trend for a while, and that’s stalled. So, it seems like we are still some way from capital account convertibility and we do think that over time, that is going to be essential to, you know, sort of, China fully playing its role in the international economy. On intellectual property, I’ll perhaps defer to Yu Jie.

Dr Yu Jie

Well, I mean, I haven’t really follow – I mean, I’m not legal specialist on here, but I think one thing – apart from intellectual property we’re concerning here, and also let’s keep eyes on this new National Data Bureau, that essentially about how the government is going to use the data and how the government is going to store the data, and also how the government is going to use the data for the government’s purposes, again, is something to do with algorithm and also AI creativity. So, I think this is all the new, emerging issues that perhaps in the past whoever would follow China doesn’t necessarily need to follow, but this stage we just need to pick it up, yeah.

Ben Bland

Okay, we’ve got a question towards the back.

Jonah Kaplan

Right, hi, Jonah Kaplan from the United Kingdom National Committee on China. I was just wondering, in light of the IMF warnings today that friendshoring is a serious damage to global growth, and in particular, highlighting – let’s – when – me highlighting Apple’s moves of its supply chains out of China towards India, how is China likely to respond to growing strategic economic competition from India and other regional states? Thank you.

Sarah Hewin

I mean, I think – I mean, I – we would probably see it in a more positive light. China benefitted – you know, after WTO membership benefitted hugely from rising trade, rising investment, benefitting from, sort of, demand for its goods globally. But the opportunity for China now, and has been for a while, is moving up the value chain and, you know, as I mentioned earlier, we’re already seeing investors, you know, looking for – or businesses spreading their investments around the region, looking for, sort of, low value-added investment in countries where you have low wages.

So, I think this is a, sort of, natural process, rather than – you know, you can see it as being part of a natural process, rather than necessarily in a particularly, sort of, sinister light. So, you know, we would take the view that, you know, India’s development is good for the global economy as much as China’s development and there are, sort of, opportunities that will have arisen across the Asia region.

Ben Bland

Yeah, there’s a question here, a gentleman in glasses. No, sorry, in fron – just in front, first. So – yeah. We can come to you next.

Member

Yeah.

Michael Mo

Hello, Michael Mo, a former pro-democracy Hong Kong councillor, right now Sanctuary Scholar at the University of Leeds. So, one of question I will have, like, comment and question about it, is that whether we should have a healthy scepticism about the opening up of, like, private enterprise involvement in China’s, like, current economy. For instance, we still see, like, similar words have been spoken in 2018 from Xi Jinping, at the same time we see, like, a bit of, like, private sector’s head is absent from the meeting this year, and Sun Dawu is still, like, being jailed for now. And so, for me, I would like – is it just a repeat of rhetoric, instead of, like, really opening up? Yeah.

Ben Bland

Yeah, Tianlei, do you want to take that one?

Tianlei Huang

Sure. So, it’s not only just a repeat of rhetoric, it’s a repeat of a cycle. You see that they also use the private sector as a contracyclical lever. When they need growth, they would, you know, say a lot of nice words about supporting the private sector, and when they feel like, you know, economic conditions look good, they do something to correct course. Sometimes they do have logical and legitimate justifications for doing that. That was the case two years ago when they crackdown on the platform industries, they did have logical considerations on anti-monopoly, on data and etc., but they did everything all at once. That was the biggest issue, the campaign-style crackdown on the platform industry led to – it had a spill-over effect across board, right? Private companies in other industries were also hurt badly.

We at the Peterson Institute track the private sector share among China’s largest companies, since Xi Jinping came into power roughly a decade ago, and we see that the private sector share among China’s largest company, not only listed but also non-listed companies, it was increasing really fast through 2019, and since 2020 things starting to change. We see a very visible retreat of the private sector among the largest companies since 2020, and it’s not – it has not recovered yet. So, this is a cycle. I mean, that’s why the lack of – the issue of the lack of confidence among private entrepreneurs is a repeated thing that you hear from time to time.

Ben Bland

Thanks, Tianlei. Yeah, those – yeah, gentleman just behind, as well.

Member

George – I need to switch it on? No. George [inaudible – 56:34], member of Chatham House. I’ve travelled to China several times over the last ten/15 years and looked at the increasing number of coalfired power stations that’ve been built, the lack of infrastructure, the serious local government debt, which I’ve always felt has been brushed under the carpet, which is never the right thing to do with government debt, in my experience. I think everybody’s being very, sort of – predominantly optimistic about the future of China in the panel, and I question that. I question that China’s support of Vladimir Putin and Russia’s invasion…

Ben Bland

So, in terms of questions, is there a question?

Member

There is a question. I’m, basically – I’m questioning whether China will continue to be the focal point of international trade, and particularly in the light of threats towards Taiwan, the way they’ve treated Hong Kong. I think this glorified projection of China as being the centre of the universe is not going to be sustainable in the five/ten/15-year period that the panel were suggesting that companies ought to be looking at.

Dr Yu Jie

Yeah, sure. I mean, it never supposed to be a glorified picture as such. I think – I mean, that’s definitely not the job what we do at Chatham House, and what we’re trying to say is what are the policies and what are likely short-term implications? And none of us are actually in the Cabinet, in the room of Zhongnanhai, so we wouldn’t know. We can only judging from public services and judging by words. But as I said earlier, it’s these matter more than words for now, and really, for many of the Chinese private entrepreneurs, and I mean maybe perhaps they could use old Chinese saying here, is, “Once you’re bitten by a snake, you’ll be really scared by a rope” when you come across with a rope. So, that is where we are with China these days.

Now, secondly, regarding that picture of that gigantic – China as the gigantic entity, as if that Xi Jinping can decide everything, and I think that is also far from being a reality, as well. Even though he has managed to secure his third term, he still have to deliver all this mountainous task by all his colleagues around him, you know. Look at that team of 24 Politburo, I mean, each of them will be tasked in different sectors and policies, and he still have to count on the others to deliver those tasks, and then, hence you have various political trade-off as well. So, I wouldn’t necessarily concede that it’s just one man’s show and one man’s country, but actually, it is a continent that perhaps as complex as it will really take a 24-hours job to try to understand.

Ben Bland

Thanks. We have a question at the front.

Member

[Inaudible – 59:46], guest of the House, from Hong Kong. Just when, like, the previous gentleman talk about, like, the future of China. So, when I think about, like, the current demographics, like, it’s so important, then how – whether it can be resolved, like, beside immigration? Thank you.

Ben Bland

Yeah. So, it doesn’t look likely that China is going to have an open immigration policy. Someone…

Member

Yeah.

Ben Bland

Someone told me recently, I haven’t checked the facts yet, that Switzerland has more foreign residents than China, which is quite revealing. Yeah, so, yeah, short of immigration, what realistic solutions are there?

Tianlei Huang

Well, can I…?

Sarah Hewin

I suppose – oh yes, no, go ahead.

Dr Yu Jie

No, go on.

Tianlei Huang

It’s okay, no.

Ben Bland

Go for it, Tianlei.

Tianlei Huang

Sorry, sorry. Well, I think, you know, this view that China is doomed to fail because of its demographic challenges is sometimes exaggerated. China is still a partially urbanised country. People are still moving from the countryside to cities, from agriculture to urban jobs, from smaller cities and towns to bigger cities. I mean, these trends are very clearly shown in the latest 2020 census data. So as long as, you know, this source of growth, which is urbanisation, continues, you know, I – the demographic issue will not bite, at least in the short to the medium term.

And also, we talked about human capital earlier on this panel, the Chinese working – workforce is getting increasingly skilled, partly because the younger generations are substantially more skilled and well educated than the older generations who are exiting the workforce, and also, China is gradually pushing forward this agenda on later retirement. So, these factors will offset some of the drag from a declining demography. Of course, that is not to say that China does not face serious demographic challenges, it does, and the demographic issue poses problems to other areas in the economy as well, like the social security system and, also, government finances. These issues are, in themselves, are real and serious, but I’m just trying to say here that this view that China is doomed to fail because of demography, is sometimes exaggerated.

Oh, by the way, there is indeed a mention of opening for immigration in the latest Five-Year Plan. There’s just single – there is a single sentence. No detail has been announced, but…

Ben Bland

Well, we’ll look forward to that. I think we have time for one more in the room, and maybe right at the back, in that corner.

Phoebe Boswall

Thank you. I wanted to ask a question about the trend of restrictions on information coming out of China. This obviously isn’t a, kind of…

Ben Bland

You’ve got to tell us who you are, sorry, first.

Phoebe Boswall

Phoebe Boswall from a London-based business intelligence company called Alaco. So, yeah, restrictions on information coming out of China is obviously not a new trend, but in term – there are a few things that happened recently that I thought were perhaps of note. So, the restrictions on access to an academic database, and then this law, PIPL, the Personal Information Law, that I think the sixth month gross period was up at the beginning of March. And so, in terms of data coming out of China I just wondered whether at Standard Chartered you’ve seen any practical implications for clients there, and then also just in terms of a broader trend, whether this law you think will actually – maybe to Yu Jie, will, you know, actually be enforced, and whether this could be a problem for foreign companies looking to do business in China?

Sarah Hewin

Yes. I mean I’m afraid I can’t speak specifically on that law ‘cause I’m not familiar with it. The ideal is to have free-flowing information and, you know, as much accurate information as is available. And the more information is constrained and the more that the flow of information is constrained, the more difficult it, you know, it is to, sort of, build businesses and attract investment. So, I mean, that’s just a sort of, broad comment that I would make, but Yu Jie, if you could do the specifics.

Dr Yu Jie

Yeah, I mean I didn’t study that law anyway, but I did read something and we actually – Chatham House, we did a workshop to study, like, China’s Personal Information Law, and also Data Security Law. Quite interesting, what we found out among all the cyber expert is that it seems to be there’s some similarities between the European’s GDPR and China’s Personal Information Law which has been introduced, that’s for show. But the key difference in here is that obviously GDPR, you cannot disclose your location of the data, whereas in China, you’re required to disclose the location of data. So, I think that’s really the bone of contention here and we shall see how that’s going to develop, but so far, I think the government should know the information – most of the information.

Ben Bland

Well, thanks, thanks for all your questions. Hopefully, we’ve provided some useful information, although we can’t answer every question about China’s future in a one-hour panel. But I’m sure we’ll have many more events on Hong Kong and Taiwan and lots of other important questions, too. But please, for now join me in thanking our panellists for their great interventions throughout…