Per reporter: Zhang Shoulin Per editor: Wen Duo
The summer flowers are gorgeous, and the two sessions of the National People's Congress in 2020 will be held as scheduled. At this moment of great attention, the reporter of the Daily Economic News (hereinafter referred to as the NBD) interviewed Jin Li, a member of the National Committee of the Chinese People's Political Consultative Conference and a chair professor at the Guanghua School of Management of Peking University. He has a profound observation of china's current economic operation and puts forward unique suggestions.
About Professor Jin Li: Chair Professor and Doctoral Supervisor, Guanghua School of Management, Peking University, Director of National Financial Research Center of Peking University, Director of Management Case Study Center of Peking University. He was a Professor of Finance at Harvard Business School and an Executive Director of the Fairbank Center for East Asian Studies at Harvard University, and is now a Professor of Finance at Oxford Business School (tenured full professor and PhD supervisor), and a researcher at the China Center at The University of Oxford.
At Harvard Business School, Oxford, and Peking University, Jin Li teaches courses in capital markets, corporate finance, and corporate governance to MBAs, MBA, undergraduate and graduate students. His research interests include international investment and financing, venture capital and private equity, hedge funds, wealth management, family business governance and succession, domestic and cross-border mergers and acquisitions, capital operations, etc.
<h2>Some foreign companies do feel pressure from U.S. politicians</h2>
NBD: Recently, some US officials have called for the withdrawal of US companies in China, which has triggered a slight concern in the market about the withdrawal of foreign companies from China. Subsequently, the US Department of Commerce issued new export control regulations against Huawei, revealing the hint of "decoupling" from China's high-tech field. We know that at this year's two sessions, you submitted a number of proposals, which involved the issue of "withdrawal of foreign enterprises". How do you think you should face the voices about the "withdrawal of foreign companies"? Are these voices likely to have an impact on foreign companies or the Chinese economy? Or do you just ignore these sounds?
Kim Lee: Actually, these voices can be said to be a challenge to Sino-US relations, and there are far-reaching political considerations of the US government behind them, which have been foreshadowed before. The epidemic has only intensified the containment of us by some US politicians hostile to China, including creating various public opinion provocations.
I think that these are irresponsible at the lowest level and sinister at the highest. We need to deal with it properly because there are certain risks involved.
With regard to this practice of the United States, public opinion believes that this is typical of harming others and harming oneself. Because since China's reform and opening up in 1978, it has welcomed foreign-funded enterprises to invest in China with open arms, and foreign enterprises have a history of development in China for decades and have a very good accumulation. Although foreign enterprises have great help to enhance China's national strength and solve many employment problems, at the same time, foreign enterprises themselves are constantly creating profits and returning to their home countries through various forms, which has greatly helped their parent companies and home economies. In fact, it is a win-win situation.
Now, there are politicians in the United States who are demanding that US companies withdraw from China, making this noise at the politician level. It should be said that some foreign-funded enterprises have more or less felt various pressures, including pressure from public opinion and the impact of the epidemic. This has a certain impact on the mentality of some foreign companies, and even some companies will begin to consider that if the situation continues to deteriorate, they may be forced to make some very difficult decisions - such as leaving the Chinese market. If this is the case in the end, it will be a huge loss for these enterprises, but it will also have a negative impact on the Chinese economy and Employment in China.
From a practical point of view, first of all, the pressure is indeed there. As far as we know, some companies have begun to consider this issue.
From the perspective of ordinary Chinese people, many people are angry about this: these foreign companies have made money in China and are going to run now. Some people will even say "don't let foreign companies run away"!
From the perspective of foreign companies, in fact, this is a helpless choice, it does not want to go! Is it making good money here, not good for itself? Sometimes, it faces all kinds of tangible and invisible pressures, and may eventually be forced to make choices.
In this case, we have to think about it, who is our friend? Who is our enemy? We must make our friends more and our enemies fewer.
The real hostility to China is a small number of American politicians, not these entrepreneurs. The entrepreneur came to China to make money, and he didn't want to leave China because he could continue to make money by staying. So he didn't want to go.
Therefore, my interpretation of the nature of this event is that foreign companies do not want to leave, and we do not want to see it leave. Who really wants to see them leave? It is a small number of American politicians represented by Trump.
<h2>If U.S. companies are going to withdraw, we can't deal with it emotionally</h2>
NBD: So if there are really a few foreign companies withdrawing, how to deal with it rationally?
Kim Lee: First of all, if we think, "He's going to run with his money now, he can't let them run," I think it's an emotional reaction. It is not denied that this formulation is also out of patriotic thoughts, but if we look at the issue of "foreign company withdrawal" with emotion, it is likely to push our original friends to the opposite side.
I would still like to say that the entrepreneur himself wants to make money in China, he will not voluntarily withdraw, and if he does, then the problem will be: what about his store? What about inventory? What about employees? Some inventory can be sold at a discount, but the production equipment may not be taken over, the production capacity will be scrapped, and the production line can only be recycled as scrap copper and rotten iron.
If we really deal with the mentality of "setting up obstacles and not letting foreign companies run", let him be cornered, and flee without making proper arrangements, from China's standpoint, is this a good thing or a bad thing for us?
As a direct result, these domestic production capacities have been lost, and many jobs have been sacrificed. Who was injured when a foreign employee was fired? A lot of them are our people.
The indirect impact is that after our reform and opening up, the international reputation that we have built up so hard may be impacted. If these enterprises suffer huge losses in China as a result, and return to foreign countries to feel that China was merciless to them at that time, withdrew very badly, and may not be willing to deal with China in the future, such as purchasing materials from China, etc., the supply chain system may not continue to open to us.
Further, some international institutions and people who do not understand the situation may say that when attracting foreign enterprises to come in, China has said all the good things, which is called opening the door to welcome guests; when leaving, it is blocked, which is called "closing the door and hitting the dog". Leaving this impression, how can we open the door to welcome guests in the future? After the situation improved, we said to foreign companies: Welcome to invest in China, we will treat you kindly. One might say, look at who's who, how badly they evacuated.
We say that trust is not easy to build, but it is very easy to destroy it. Once destroyed, it is even more difficult to build.
I understand this issue from the perspective of the interests of our country and the rationality of the Chinese people, not the ultimate consideration of withdrawing foreign companies. It's just that we have to think about long-term interests and how to maximize our interests as much as possible.
So we can't be too emotional, think about what we ultimately want, and do it; what Trump wants to do, then we try not to do it.
Trump actually wants to see us kill all the foreign companies that are ready to withdraw, and clean them up very miserable and messed up. If this is the case, he can say to his people: Look, I remind you not to invest in China. If you don't listen to our American advice, you see, how tragic the end is! Who among you would want to follow in their footsteps? I think Trump might think: That's great! The Chinese people did me a favor.
But in an emotional state, we may think that whoever defends a foreign company is unpatriotic. But after a little calm, we should think more thoroughly, more long-term, and consider what is good for us. If we do not deal with it properly, we may push foreign companies that originally have good intentions toward China and hope for a win-win situation when doing business in China to Trump's side. We did what Trump wanted to do but didn't — create a negative image of China. Therefore, things are often either black and white, and should not hold the idea that "those who come to me are good people; those who want to withdraw from me are bad people", which is a relatively simple and rough emotional reaction.
<h2>"Make more friends and few enemies."</h2>
NBD: If there is a real withdrawal of foreign companies in the end, rationally, can we do anything?
Jin Lee: First, it is definitely best to create conditions as much as possible without evacuating.
In fact, some foreign companies are still a little worried: under the current situation, will China not adhere to reform and opening up? Will we not insist on deepening the market economy? Then we should let them eat a reassuring pill, that is, no matter how the global situation changes, no matter how a small number of US politicians adhere to the anti-trend approach of de-globalization, China will unswervingly promote in-depth reform and opening up and in-depth marketization. We embrace globalization, and we pursue the allocation of resources in a market-oriented manner without wavering.
Specifically, we have reduced administrative intervention in the field of foreign investment as much as possible, such as the comprehensive opening up of the financial industry to foreign investment. Through these specific work, the concerns and concerns of foreign companies will be eliminated as much as possible.
Of course, it is difficult to say that this can be solved by doing work, and there may be a small number or individual foreign companies, which will eventually withdraw under the influence of various factors. In this case, I think we should still face it with the mentality of "come to us to welcome, go to us to send farewell", that is, we regret that you have to leave, but we also understand your difficulties. Don't embarrass you, let you walk comfortably, as much as possible not to be embarrassed.
After all, in the process of hasty withdrawal, its production line may not have a suitable next home to take over, and intangible assets such as scientific and technological research and development and marketing networks that have been invested in China may also be seriously injured due to improper disposal, or even disappear.
So if he's really going to go, let's make it as little as possible without causing as much shock and harm to both sides as possible— not only psychologically, but also physically.
The specific suggestion is that, for example, when the enterprise withdraws, it is necessary to find a suitable takeover enterprise, transfer intangible assets such as inventory, employees and trademark goodwill to the market-oriented private enterprises, and revitalize the assets as much as possible. In a very short period of time, the right company may not be found, can the Chinese official provide some assistance, such as helping him shout a few times: Hey, this has a foreign company, for various reasons, I regret to evacuate China, and now I want to find the next home. They have good assets, our private enterprises, you can take a look. The government encourages private enterprises to take over.
Further down, one of the problems facing private enterprises is that private enterprises are not living well now, and in the first quarter, there were more private enterprises that were seriously injured. Therefore, some industries may not find a suitable private enterprise to take over.
What we hope most is that private enterprises representing important market forces come forward - because we hope that China's image is to adhere to marketization, reform, and openness, but if private enterprises really can't take over, many of our state-owned enterprises have the ability to have this resource, which can be used as the last line of defense... In a role similar to that of the lender of last resort in the economic sphere, it is necessary to prevent production capacity from being dismantled and eventually wiped out.
Looking further, if foreign capital sells the enterprise, he can withdraw with the funds, and we can also discuss with him, one idea is: now you can't do a physical enterprise in China, worry about Trump's dissatisfaction with you, but if you are still optimistic about China's development, we allow you to make financial investment. For example, foreign companies sell to private enterprises is 30 million yuan, private enterprises say, you change to DOLLARs to take away, no problem! However, if the M&A enterprise is worth 100 million yuan, it can also be proposed to convert the transaction amount into 30% equity, let foreign investors as equity investors, continue to benefit in China, and continue to play the value of foreign supply chain systems to help enterprises connect production capacity to foreign consumption channels. In this way, everyone is a community of interests. This is exactly what I said earlier, to make more friends and fewer enemies.
Finally, what if the U.S. government continues to deepen decoupling and foreign investors are forced to do nothing about financial investment? At this time, our country's foreign exchange reserves, (wanted) directly from the US market, the US government can be obstructed in various ways, and may also come to a "shutdown". Moreover, we invest in Treasuries in the US market, because it is the government's foreign exchange reserves, and the US may not have the slightest moral hesitation in obstructing it... If we really reach the step just mentioned, we can take out a part of the foreign exchange to set up a fund, which is specially used to exchange and undertake the production capacity, marketing network, technology, including the employee system and so on accumulated by foreign enterprises in China for decades. Ultimately, this is still more cost-effective.
At this point, our government has done its utmost in benevolence: under the hasty withdrawal of foreign enterprises, we finally helped and bought these enterprises. Good fit and good scatter! In the future, conditions permitting, we will still welcome them back. What will other foreign companies think when they see this? I think it will be said: China has done a really fantastic job.
Image source: Photo.com
<h2>The use of foreign reserves is just in time: the government places orders, and foreign reserves pay bills</h2>
NBD: Speaking of foreign exchange reserves, China's foreign reserves are at a high level, and due to the impact of the epidemic and the restructuring of the global supply chain, orders from some of our export enterprises and their upstream enterprises have declined. Can foreign exchange reserves also play their due role in the recovery of the domestic economy?
Kim Lee: What are foreign exchange reserves used for? It's about coping with the unexpected. This is the money we have in our pockets, and if we have difficulties, it is time to take it out now.
Now affected by the epidemic, our economy needs to recover, our difficult enterprises, difficult families need to be rescued, who will pay? There are various theories, some people say that the fiscal deficit is done by increasing the central bank's monetary issuance – and this is now the case in the United States. But the biggest concern is that once the deficit is monetized, we actually have little fiscal discipline and can print as much as we want. In the short term, this solves the immediate financial difficulties, but in the long run, it is a huge harm to our monetary credit. When the Kuomintang was about to fail, it indiscriminately issued financial bonds and disrupted the financial order, which was a very painful lesson. So our government is now very cautious, but it has to bail out the struggling economy.
Where does this problem come from? I think one of the things that can be done is to take advantage of our foreign exchange reserves. You can calculate it, and (then) take out a low proportion to support the resumption of work and production of export enterprises.
The government can take over some of the orders from exporting companies for public expenditure or international aid. Who pays? The countermeasure is that the government places an order and the foreign reserve pays the bill.
Since it is in response to unforeseen needs, it is not used now, when will it be used? And as mentioned earlier, one of the concerns is that foreign exchange is placed in the US Treasury market, and dollar inflation can easily break through its value. (After all) in this round of epidemic relief alone, the US budget has increased by $2.3 trillion, mainly an unlimited amount of quantitative easing, because the US government can't afford to pay. Because it solves the problem of economic unsustainability, it mainly relies on this unlimited amount of quantitative easing.
NBD: Are there any more suggestions for the domestic economic recovery?
Jin Li: The main problem in the recovery of the domestic economy is the difficulty of small and medium-sized enterprises in operating. In the early days, the process of resuming work and production was slow, and now it is mainly focused on insufficient orders. Orders, one from external demand, one from domestic demand. The epidemic situation abroad is still continuing, and many orders have been cancelled, which has caused a certain impact on our export enterprises and their upstream enterprises. In this part, as just mentioned, the government can give a vacancy according to the previous order capacity of the enterprise, buy the goods, and solve the problem of the decline in external demand orders. Domestic demand orders have also declined in demand, mainly because some people have certain difficulties in their lives, especially low-income people. 2020 is also the year we have won the final battle against poverty, the epidemic has aggravated their difficulties, and we are obliged to provide assistance. This is also the superiority of the socialist system. The demand of the low-income population has recovered, and domestic demand has gradually stabilized. Once the internal and external demand terminals are stabilized, the enterprises in its upstream industrial chain also have orders, and our entire economic system is activated.
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