Chen Bai, a reporter of this newspaper, and Xiao Luyan, an intern reporter, reported from Beijing
The Russian-Ukrainian conflict, the Lun Nickel storm, the "pre-delisting" of Chinese stocks... Since entering 2022, the uncertainty of global geopolitical economy has continued to intensify, and under the spread of pessimism, the capital market has repeatedly experienced stampede effects, especially after the plunge in Chinese stocks, and even the sound of Accelerating decoupling of Sino-US capital markets has emerged. Since the Sino-US trade friction in March 2018, the capital market is in a new dark moment.
However, Tao Zhigang is one of the few optimists in the current market. In his view, further decoupling was unlikely.
Zhigang Tao holds a Ph.D. in Economics from Princeton University, is currently a Professor of Strategy and Economics at Cheung Kong Graduate School of Business, Associate Dean of the MBA Program, Executive Director of the Entrepreneur Scholars Program, and has taught at the University of Hong Kong and the Hong Kong University of Science and Technology. His research has been cited in the Wall Street Journal and The New York Times.
In an exclusive interview with the Economic Observer reporter, Tao Zhigang believes that the previous trade conflict between China and the United States has hurt the United States. The continued inflationary pressures in the United States in recent times prove that the United States has not found the production capacity that could replace China as expected five years ago. Import restrictions on Chinese products are affecting the future of the U.S. economy.
In February, U.S. inflation hit a 40-year high. According to data released by the U.S. Bureau of Labor Statistics, the consumer price index (CPI) rose 7.9% year-on-year and 0.8% month-on-month. After the Fed's March interest rate meeting raised, the US inflation expectations not only did not fall, but further upwards, the current US 10-year inflation expectations have approached 3%, the US Treasury nominal interest rate has also been close to 2.5%. In response, according to the Fed's current roadmap for interest rate hikes, the market expects a total of 7 rate hikes this year.
But the Fed's March rate hikes and forward guidance have yet to reverse market expectations. On March 29, US time, the spread between the 10-year and 2-year Treasuries briefly fell below zero, but then widened. The inversion of the Treasury yield curve adds new complexity to the debate within the Fed about the magnitude and speed of rate hikes.
It is precisely for this reason that Tao Zhigang's judgment is that the probability of further decoupling between China and the United States is not large, on the contrary, promoting the resumption of cooperation between China and the United States will be a more realistic choice for the United States.
For the prediction of the future development of China's economy, Tao Zhigang put forward the concept of "McDonald's economy". Just as McDonald's company's model is a model of self-operation + franchise operation, Tao Zhigang believes that in the development of the market economy, state-owned enterprises and private enterprises are like the relationship between self-operation and franchise, "self-operated stores have low profitability, franchise stores have high profitability, self-operated stores are responsible for creating brands, and franchise stores are responsible for making money." ”
Tao Zhigang believes that in the moment of great crisis, state-owned enterprises need to play the role of stabilizers. At the moment of recovery from the crisis, it is necessary to activate the creativity of private enterprises as much as possible to provide a more relaxed development environment for their survival and development.
The picture shows Professor Tao Zhigang (courtesy of the interviewee)
【Dialogue】
Restart globalization
The Economic Observer: What are the main impacts of the current geopolitical changes at the market level?
Tao Zhigang: The economy in the first quarter was indeed full of uncertainty. The Crisis in Ukraine, coupled with high inflation in the United States, is the biggest concern for everyone at the moment. From the early 1980s to the present, especially in the past two decades, despite the Fed's multiple rounds of quantitative easing,
The United States has maintained a low inflationary environment. But this time is different, in the face of the highest inflation in four decades, the Federal Reserve finally raised interest rates on March 16, and the Ukraine crisis has exacerbated inflation in Europe and the United States. Russia produces 10 million barrels of oil per day, accounting for 13% of global production. Natural gas production accounted for an even greater proportion, reaching 17%. Of course, how much oil and gas prices rise depends on the success of the US policy of sanctioning Russia. The attitude of U.S. allies is unclear, such as India's purchase of cheap oil this time. The EU's 27 countries are also vague.
We may feel that buying less oil has little impact. But as long as you query the historical data, you will find the irreplaceability of oil. Over the past half century, oil prices have fluctuated several times. In November 1973, global oil supply fell by 7% and prices rose by 51%. In August 1990, due to the impact of the Gulf War, the supply in the Gulf region decreased by 9%, the global supply decreased by 6%, and the oil price increased by 93%. Past data is a bit of an exaggeration, but it can be seen as an important warning. Why germany and the Netherlands are now reluctant to follow U.S. orders to stop buying oil from Russia, because it is difficult to find alternatives. Natural gas is expensive to transport, including liquefied natural gas recommended by the United States, so Europe is more dependent on Russian gas.
Rising oil prices trigger a series of higher prices for resources, such as coal, which replaces natural gas, and cotton, which replaces petrochemicals, all of which have risen in price. If the Fed is serious about growing inflation, it needs to raise interest rates significantly, and I think the likelihood of a recession in Europe and the United States has increased a lot this year.
What impact the oil and gas price increase will have on China depends on whether we continue and increase our purchases of Russian oil and gas. On February 28, Foreign Ministry spokesman Wang Wenbin said that we would carry out normal trade cooperation with Russia. According to people familiar with the matter, the mainland government is encouraging some large central enterprises, including PetroChina and Sinopec, to seize some potential investment opportunities and negotiate with the Russian side. Of course, the rise in oil prices is global, so the mainland economy will still be affected to a certain extent.
The Economic Observer: How to deal with this shock?
Tao Zhigang: Fortunately, China's economic cycle and the United States have just reversed. The mainland's economic growth last year fell back compared with 2020, and the growth rate slowed down in the second half of the year, but it is still at a stable level. Last year's CPI rose just 0.9 percent from the previous year. In addition, at the end of last year, we rectified the real estate industry and avoided certain risks. If companies had borrowed a lot of foreign debt at the time, they would have been at great risk now. And the impact we are currently affecting is within the estimated range.
With the US interest rate hike, the appreciation pressure of the renminbi will be reduced, which will benefit exporters. In the past two years, the mainland's export trade has been booming, one is driven by the shift of American consumption from services to goods, such as going to the gym before, and now buying a treadmill to exercise at home. This shift has indeed brought a big deal to Chinese exporters. Second, it has benefited from the epidemic prevention and control work on the mainland. With the global pandemic so complex, the United States cannot find a substitute for Chinese goods.
However, after the liberalization of U.S. controls, the proportion of commodity consumption will decline again, which will reduce the demand for Chinese exports. But if inflation in the United States is severe and the economy is in recession, and the American people increase their demand for cheap and good goods in China, then the mainland's exports will still have an advantage. What the future holds depends on the control of the value and cost of the RENMINBI.
The Economic Observer: Will this fragmentation of globalization continue?
Tao Zhigang: Since Biden took office in January 2021, people have been expecting him to change the US trade policy toward China, but this US president has lacked the courage to change, which has disappointed everyone.
Now that the U.S. economy has recovered, the thorny issue is mainly inflation, which the Ukraine crisis has pushed up. Inflation has risen to 7.9 percent, and stools are getting hotter. The democratic parties are very concerned about the lives of ordinary people, so President Biden has also continued to pay attention to inflation recently. But in his 2022 State of the Union address, Biden simply and crudely attributed the causes of U.S. inflation to a global division of labor and global supply chains. In fact, the overall cost of production in the United States is definitely higher than the cost of production under the globalized division of labor, and the supply chain disruption has its own reasons. The United States should realize that now is the worst decoupling time point. Choosing to do their own thing at the time when inflation is at its worst is definitely to further push up the operating costs and inflation of US enterprises, bringing risks to the operation of the entire US economy.
November is the U.S. midterm elections, and Biden needs to address inflation as soon as possible. Monetary policy is unlikely to work right away, but restarting globalization and enabling global resources to serve global consumption can quickly reduce inflationary pressures. So this four-decade high in inflation actually gives Biden an opportunity to change U.S. trade policy toward China.
The Economic Observer: How do you see the impact of the trade war in 2018 today?
Tao Zhigang: The Sino-US trade war has a considerable impact on the Chinese economy. We can understand it this way: if we have 100 export companies, there may be 20 that will not survive, but the companies that remain must be more efficient and less costly, and can provide the world with lower prices. The negative impact of the trade war on the United States is great. Local companies that would otherwise have high costs and could not survive in the market have survived, which means that prices have risen and downstream industries have suffered. For example, when the steel industry is protected, some jobs are retained; but the number of jobs in downstream companies decreases. Protecting one industry alone does not benefit overall employment. At the same time, the purchasing power of wages is reduced by rising corporate costs and inflation.
The restart of globalization between China and the United States is good for the United States as a whole, which is reflected in the fact that the added value of manufacturing enterprises in the United States has been rising, but the number of jobs in the manufacturing industry is indeed declining, because American companies have placed some production overseas. So the problem of globalization in the United States is actually a problem of redistribution, and companies have profited from globalization, but some workers have been hurt. Unemployed workers need subsidies and retraining, but businesses benefit far more than these unemployed workers need.
We generally evaluate U.S. economic policy from two dimensions. First, does the United States support or oppose globalization? Opposing globalization means that the cost of enterprises increases, and embracing global enterprises can become bigger. Second, is the United States opposed to redistribution or supportive of redistribution? Faced with these two policy dimensions, Americans are often torn apart. Trump is trying to make the pie smaller and distribute more to the rich. Obama opposes globalization, so where does the welfare of the poor come from? The Affordable Care Act is a huge amount of funding. On the other hand, although China has different degrees of openness in different periods, it has always taken into account both openness and common prosperity.
"McDonald's Economic Model"
Economic Observer: This year's government work report put forward a growth target of 5.5%, how to achieve it?
Tao Zhigang: Judging from the development of the past four decades, this is a reasonable goal.
Maintaining China's steady economic development in an increasingly volatile global economic environment is the first element in achieving this economic growth goal.
Europe and the United States face the risk of inflation plus oil supply disruptions, the Federal Reserve said it would speed up interest rate hikes while delaying the best time to control inflation, and historical experience suggests that the European and American economies may enter a recession. In the past two years, the Chinese government has adopted a very cautious macroeconomic policy, and has not adopted a loose monetary policy or a large-scale fiscal stimulus policy like that of European and American countries, so there is relatively large policy space. If China's economy remains stable, investment by multinational companies will naturally increase.
The second is to vigorously improve the operating environment of private enterprises while ensuring a stable growth environment through state-owned enterprises, so as to achieve this year's growth target. More than 20 years ago, I co-authored an article with Professor Bai Chong'en, Professor Wang Yijiang and Professor Li Daokui, "Multi-Task Theory of State-Owned Enterprise Reform", which was inspired by an earlier study on franchising. Professor Bai Chong'en and I studied the "McDonald's economy" to explain why McDonald's has both its own stores and franchise stores, and found that McDonald's retains low-profit self-operated stores in order to create brands, while franchise stores rely on the public goods of the brand plus the original incentive mechanism to achieve efficient profitability. In the article "Multi-task Theory of State-Owned Enterprise Reform", we emphasize the division of labor and cooperation between state-owned enterprises and private enterprises. State-owned enterprises are similar to McDonald's self-operated stores, and private enterprises are franchise stores. Although private enterprises are growing efficiently and rapidly, state-owned enterprises have assumed the responsibility of stabilizing society, especially in situations of crisis or economic recession, and state-owned enterprises have also grown in this situation. Recognizing the special role of state-owned enterprises, we emphasize the contribution of private enterprises to the growth rate. In addition to maintaining China's international investment attractiveness, we also need to improve the operating environment of private enterprises to achieve this year's growth target.
The third important driver is innovation. Maintaining China's economic growth requires not only greater investment in human and material resources, but also continuous improvement of total factor productivity. Chinese people have a high labor force participation rate and are very diligent, and the savings rate and investment rate are also high, but the improvement of total factor productivity should be more important. In recent years, our total factor productivity has been on a downward trend, which is worrying. One possible reason is that as China's economy continues to grow, we are beginning to approach the forefront of the industry, traditional
The growth model (low-cost development model) reaches its limits. At the same time, the decoupling of the U.S.-China economy highlights many of the technical problems that card China's neck. At present, the government has increased investment in scientific and technological innovation, bringing huge business opportunities to enterprises.
The RCEP launched this year also brings some opportunities and challenges to China's economic growth. Our low-tech, export-oriented industries or businesses will invest in ASEAN, taking advantage of local low costs and bypassing Eu-US tariffs to continue to serve overseas markets. At the same time, Japanese and Korean enterprises can also bring competition to our high-tech industries and enterprises through exports, which will further promote the innovation of Chinese enterprises. Enterprises need to compete, and sooner or later they will have to face competition, and China's experience in joining the WTO proves that our industry can also bear the pressure. At this node, we must go upstream and enhance our innovation ability and independent production capacity.
A change in corporate strategy
The Economic Observer: In the formulation of corporate strategy, how to deal with the current multiple uncertainties?
Tao Zhigang: In response to the current multiple uncertainties, enterprises need to diversify their business risks, and there needs to be business diversification in different industries and different regions. Industry diversification includes horizontal diversification of related industries, coupled with vertical vertical integration of supply chains and clients. Of course, in times of geopolitical tensions and rising protectionism, multi-regional and multi-country operations will encounter some unique challenges that require the application of a series of non-market strategies. Even leading U.S. companies like Amazon have invested a lot of resources in Washington, D.C., for non-market strategies. Whether Chinese companies go to developed or underdeveloped countries, they need a number of different non-market strategies.
At the same time, in the cross-regional and cross-country operation, we use different organizational forms to do business according to our needs. Chinese companies prefer to acquire or establish sole proprietorships overseas, making it difficult to gain support from local businesses. Recently, I conducted in-depth interviews with several Cheung Kong Graduate School of Business alumni and found that they cooperated with local enterprises in Southeast Asia and Europe to obtain industrial upgrading and business expansion.
In addition, in the case of the long-arm jurisdiction of the United States, many of our companies need to carry out horizontal spin-offs, use completely different enterprises for internal and external circulation, and use different enterprises to develop business in different countries. Although this operation lacks economies of scale, it can avoid the risks of U.S. long-arm jurisdiction.
The Economic Observer: What new requirements do changes in the business environment place for business schools?
Tao Zhigang: We will increase our efforts to cultivate students' global vision. If enterprises want to become stronger and bigger, the scope of business cannot be limited to China, and they must go out. The great Chinese enterprises of the future must have both global resources and markets. But geopolitics is becoming increasingly complex, and companies outside the country are likely to be shot without a global vision. Therefore, Cheung Kong Graduate School of Business cooperates with top universities and research institutions around the world to create a global learning platform and provide students with a global perspective from multiple perspectives. For example, the Yangtze River MBA and the Johns Hopkins University Carey School of Business have jointly developed an innovative international cooperation program to help the rapid growth of MBA students in a shorter period of time with diversified and flexible teaching methods, and to supplement the chemical reaction brought about by the advantages of both sides. At the same time, the Yangtze River MBA program also hopes that the trainees can have benevolent humanistic care and social responsibility, so as to truly realize the global value docking and become the new generation leader of future business.
Second, it is necessary to cultivate the awareness of industrial upgrading and going up. With China's economic growth and continuous increase in national income, the space for Chinese enterprises to take advantage of low-cost advantages to occupy the global market will decrease, and will be replaced by industrial upgrading and value enhancement.
The positioning of our project is to "cultivate the iterative power of the new generation of economy", including: MBA in comprehensive management, MBA in finance and MBA in intelligent manufacturing and entrepreneurship, three directions of independent advantages and boundless integration. Among them, the MBA direction of intelligent manufacturing and entrepreneurship has long been concerned about the industry practice of advanced manufacturing, established cooperative relations with a large number of advanced manufacturing enterprises, summarized the experience and lessons of Chinese enterprise innovation, and cultivated talents for scientific and technological innovation for entrepreneurs and managers who do intelligent manufacturing and traditional manufacturing upgrading. Promote the industry to go upstream.
Third, entrepreneurship has always been a tradition and strength of Cheung Kong Graduate School of Business. We have always encouraged students to start a business, to use global markets and resources in entrepreneurship, to understand global geopolitics, and to stand at the forefront of industrial upgrading and industry development.