60 minutes with Kishore Mahbubani

A discussion between Professor Kishore Mahbubani, Distinguished Fellow, Asia Research Institute, National University of Singapore, and Alexandre Tavazzi, Global Strategist and Head of CIO Office at Pictet Wealth Management

Kishore Mahbubani, considered one of the Asia’s leading public intellectuals and author of numerous articles and books (including ‘Has China won?’), in conversation with Alexandre Tavazzi, Pictet Wealth Management’s Chief Investment Officer in Asia, about the short- and long-term challenges and opportunities facing China and the ASEAN region.

Immediate concerns in China

Alexandre Tavazzi (AT) – Is the Common Prosperity policy a completely new regime and what is its place in China’s long-term development?

Kishore Mahbubani (KM) – There are two schools of thought. The first – and dominant in the Anglo -Saxon media – tells us that the goal of Common Prosperity is to undermine big, successful tech companies like Alibaba and Tencent and that China is shooting itself in the foot by discouraging entrepreneurship. The other school says that what President Xi Jinping is doing is to simply correct excesses that have developed in the system. The Chinese have studied carefully what has happened in US where huge wealth differences have developed over time, with the top 1% benefitting a lot from the economy and the bottom 50% not seeing any improvements in their real income for years. Common Prosperity is about avoiding social unrest and ensuring that the benefits of growth are shared. It’s a process of adjustments and if they work could improve things in China. [Entrepreneur] Lee Kai-Fu said recently that over the years he had invested in 1,000 companies in China. In the past, when they became successful they were eaten up by giants. But now there’s more space for companies to grow. So I’m sympathetic to the view that Common Prosperity, instead of stifling entrepreneurship is actually encouraging it.

AT – How long do you think the regulatory drive will last in China?

KM – I’m glad you’ve brought in the time dimension. In the West there is a focus on the short term. In the United States companies worry about quarterly results, governments worry about elections. But the Chinese are much more long term and strategic – with time horizons of five, 10, 15 years. They are willing to accept one or two years of pain to get 10 years of gain – for example with Covid when they shut down the country. Investors in China must play the long game. 

AT – Where do you see growth coming from over the next 10 years?

KM – The growth story will definitely switch to Asia. Over the next 10 years we’ll see a surge in the middle class population and consumption there. In 2009, the size of the retail goods market in China was USD1.8trn and in the US it was USD4trn. By 2019, two years after Trump’s trade war started, China’s retail was USD6trn, the US’s USD5.5trn. Similar things are happening in the ASEAN region. In 2000, the middle class in the ASEAN countries numbered 40 million. In 2030, they will be 230 million. In 2000, the Japanese economy was eight times the size of ASEAN – now it’s 1.5 times. And by 2030 ASEAN will be bigger than Japan. 

AT – What do you make of China’s ‘Dual Circulation’ policy, which aims to push Chinese firms up the value chain and at the same time shifting the economic focus to domestic consumption? 

KM – There are both economic and geopolitical reasons for its new ‘dual circulation’ strategy. When China had no domestic market to speak of it had to rely on export-led growth. But the largest market is the US and once Trump started his trade war, China realised there would be more restrictions coming their way, so they needed to rely more on domestic growth. But China will never give up its international trade because in the long run it helps prevent an American-led containment policy against China. In 2000 ASEAN trade with China was USD40 bn but US trade with the ASEAN group was USD135 bn. Last year, while US trade with ASEAN was USD300 bn, ASEAN trade with China was USD650 bn. ASEAN is now the No. 1 trading partner with China, so how can ASEAN contain its biggest trading partner? In 2000, Brazil took one year to export USD1 bn to China, now it takes 60 hours.

Longer-term issues

AT – 2022 may be a transition year when the Chinese economy has to adapt to the new regulatory regime. But where do you see growth coming from in the next five years? 

KM – The Chinese are extremely pragmatic. They keep adjusting and adapting. Foreign direct investment has been a key factor in economic growth and this will continue. With the outbreak of the US-China geopolitical contest one would think things would be very difficult for US investors in China. But in fact even though China has made mistakes in handling American business, it’s still a very welcoming environment. China sees US investment as a lever in the geopolitical contest between the two countries. In renewable energy, China will keep up its investments in solar, wind and so on to fulfil its commitments to COP26. But it will keep improving what it is doing today rather than make any dramatic changes.

AT – Nevertheless, China faces significant demographic challenges

KM – Yes, current demographic trends, if they continue, will be a challenge for China. But the effects of ageing and population decline will be in 2050, not now. And even if the population goes down the middle class population will increase. The government is making massive efforts to encourage the birth rate. This is not easy, and Singapore has failed in this regard. But one of the goals of Common Prosperity is to make life easier and more secure for households, especially lower income ones, to encourage them to have children.

AT – What do you expect of the Chinese communist party’s national congress next year?

KM – One needs to step into the mind of Chinese leaders. They are looking at the long term, trying to determine what the opportunities and dangers are over the next 10-20 years. The opportunity is to become the world’s number one economy in nominal terms as well as in purchasing-power parity terms thanks to continued growth and the expansion of the middle class. But the danger comes from the certainty that the US will make a determined effort to stop China becoming number one. At the Party Congress next year, I expect the communist leadership will signal that political stability is still the order of the day in China. Xi Jinping will likely get an unprecedented third term as president. The West thinks this reflects Xi’s personal ambitions. But, actually, there is a consensus in China about the need for strong, stable leadership. So, the big message from the Congress will be one of stability and continuity.

US-China relations

AT – Biden and Xi have recently held a virtual meeting and spoke cordially. Could common interests overcome strategic competition between the two countries?

KM – One would like to believe that humans are rational beings and that they will look to their common interests. But it won’t happen when it comes to US-China relations. Instead, the geopolitical contest will certainly gain momentum in the next 10-20 years. Two thousand years of geopolitical history tells us that when a new power emerges to challenge the world’s number one power, the latter will push back. Has Biden changed any of Trump’s policies aimed against China? No. No trade tariffs have been removed. But geopolitical competition between the US and China also presents opportunities — for example, for the 10 ASEAN countries being earnestly courted by both sides. Common interests may mitigate some aspects of the strategic contest between the US and China, but not the overall contest. 

AT – Shortly after Joe Biden’s election, the ASEAN group and five other Asian countries (China, Japan, South Korea, Australia and New Zealand) finalised the Regional Comprehensive Economic Partnership (RCEP) which implemented a common tariff agreement. How significant is it?

KM – It’s shocking that very few people in the West have noticed that ASEAN has pulled off a geopolitical miracle. The three largest countries in East Asia are China, Japan and South Korea. If these three countries tried to negotiate a free trade agreement together they would fail because of the enormous distrust between them built up over centuries. But now we have the world’s largest free trade agreement, which will contribute massively to Asia’s development, and people haven’t noticed it.

AT – In light of the pandemic, do you think that global supply chains will continue to shift away from China to ASEAN?

KM – The pandemic has shown the danger of relying too much on China. But I think we are moving towards a system of ‘China plus one’, where most of the production remains in China but companies continue to look at their bottom line. They know that production reliability and timeliness outside China is lower. So apart from very top-end production where intellectual property is involved, I don’t see any major shift in supply chains away from China. 

AT – Are companies still allowed to make a profit in China?

KM – There has been action to trim the sails of big tech companies and private tuition firms. But I don’t think China is making a U-turn against free markets and entrepreneurship because the growth has come from there, and this was acknowledged in President Xi’s Davos speech in 2017, when he said that China’s plunge into globalisation had made it stronger. The proof is in China’s desire to sign free trade agreements especially the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which includes safeguards for companies. So Chinese leaders may try to rein in oligopolies, but they won’t turn against markets because that’s what made China strong.

AT – What do you think of China’s ambitions in the area of semiconductors, considered the new oil?

KM – China will make a massive effort to become self-reliant in semiconductor chips. Will it succeed? I don’t know. US has a massive lead in this area. But I think it has been a big mistake by the Americans to try to control this industry’s dealings with China. This has encouraged the Chinese to try to achieve self-reliance, whereas the US would have had more leverage if it kept the Chinese bound to US technology. But it will take maybe a decade for China to achieve its ambitions.

AT – What is China’s Achilles’ heel? The problems in property development?

KM – The Anglo-Saxon media continually predicts the end of the China growth story. But people underestimate the quality of policymakers in China which has improved immeasurably and is now among the highest in world. With a controlled, slow diffusing of the problem you can prevent disaster. When it comes to property development, housing stock will be trimming as the growing middle class fills empty apartments. 

AT – How do you perceive China’s position on cryptocurrencies?

KM – It’s a two-sided policy. On the one hand, they banned Bitcoin because they cannot control it and because it can be used for illegal fund flows. On the other, the Chinese are trying to create their own cryptocurrencies. There are geopolitical reasons for the Chinese to find an alternative payments mechanism because of the danger posed by the reliance on the US dollar for international trade. The US can use the dollar as a weapon, as it has done with Iran. A cryptocurrency that they control could be a way to bypass the dollar for trade with third countries. 

AT – How does China’s attitude to the Taiwan Straits affect the rest of the world’s vision of China? 

KM – I’m pessimistic in some ways on the US-China relationship. They can probably handle most thing calmly but one issue that could cause a war is Taiwan. What’s puzzling about the Biden administration is that on the one hand it supports the One China policy where Washington has official relations with Beijing but not with Taiwan and it does not officially encourage independence. But when it invites Taiwan to a global conference on democracies, the US upsets China because Taiwan is the last living symbol of the century of China’s century of humiliation up to 1949. If Taiwan pushes for independence, China will have to declare war on Taiwan. This is a big danger and both sides will have to ensure it doesn’t happen. 

AT – What are the biggest mistakes people in Western world are making when it comes to understanding what’s going on in East Asia?

KM – The number one failure is the failure to understand that the return of China is unstoppable. Up to 1820, the world’s two largest economies were India and China; it’s only in the last 200 years that Europe and the US took off. Many in the West cannot believe that the largest economies in the world will be in Asia but they will be – in purchasing-power-parity terms three of the top four are already. The second misunderstanding results from the fact that Asian countries do not make a lot of noise, making pragmatic adjustments quietly instead. Vietnam and China have had thorny relations for centuries yet in the past 30 years there has been a 4000-times increase in trade between the two. So pragmatic adjustments are happening out of sight of the West. ASEAN is an underestimated and underrated region in the West, but it is accomplishing amazing things.