Summary by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida
Chinese
Accounting & Management Main Page | International Aspects Main Page
This is an interview the HBR Editor Adi Ignatius had with Eijian Shan who is the CEO of Hong Kong-based $40 billion private-equity firm PAG, and the author of Out of the Gobi: My Story of China and America. The purpose of the interview is to get Shan's insights about future economic prospects for China and the United States. I have included the questions from Ignatius and some of Shan's responses to convey the main ideas.
HBR: "China's economy seems to be the healthiest in the world at the moment. Does that create new investment opportunities?"
Shan: "...China has been shifting away from an investment-driven growth model to one led by private consumption... In 2019 (the Chinese) market reached $6 trillion, surpassing the U.S. level of $5.5 trillion. Even now China's private consumption represents only about 39% of its GDP - way below the U.S. level of 68% and the world average of 63%. This leaves much room for growth and many opportunities for investors, particularly in businesses that cater to consumers."
HBR: "Investors have always been enticed by China's vast market. How accessible is it these days?"
Shan: "China is the only major economy that requires no special approval for foreign direct investments, although some sectors such as Lived Change media and the internet, are on a "negative list" that restricts them.... The name of the game in China is scale. If a business is successful, it's usually open to taking outside capital so that it can quickly expand nationwide. That's why China is the most active private-equity market in Asia."
HBR: "Trade wars, nationalism, and the pandemic have led many companies to question their supply chain strategy - in particular basing manufacturing in China, thousands of miles from their markets. Are you seeing a significant shift in supply chains out of China?"
Shan: "Some...but that hasn't made a dent in either China's exports or America's trade deficit. ...Any shift in supply chains will be gradual and partial because it's very costly to move from the most efficient supplier to the second or third best. American companies will do so only if U.S. tariffs become more penalizing than moving would be. ...And what if the market itself is in China? GM sells more cars in China than in the U.S., Canada, and Mexico combined. Where can it move its production if the target market is China? China is also Apple's biggest market for iPhones: It has about twice as many iPhone users as the United States does."
HBR: "The U.S. continues to vilify China, and China does itself no favors with its poor policy on human rights. How can outside investors ensure that they don't become collateral damage in a bigger political and economic war?"
Shan: "Both countries have human rights issues, although in different forms. Investors anywhere should invest in a socially responsible way to advance human rights, adhering to a high standard for labor practices, gender equality, investment in human capital, and charitable contributions."
HBR: "The Trump administration was determined to damage China's economy and businesses. Does the U.S. even have the power to hurt China economically?"
Shan: "Here and there yes, but not in a meaningful way in general, and not without harm to itself. Trump's trade war was an abject failure. Its stated purpose was to reduce America's trade deficit. In November 2020 China's trade surplus with the U.S. was 70% greater than it had been in January 2017 when Donald Trump took office. Meanwhile, American consumers have paid for the higher tariffs, because the average prices of Chinese exports haven't decreased.... It seems that the only country that can stifle China's growth is China itself - if it makes major policy mistakes. And only the U.S. can threaten America's economic supremacy - by underinvesting in its own infrastructure and by limiting trade."
HBR: "What are the dangers in America's continued demonization of China?
Shan: "Much of Donald Trump's rhetoric and his actions on China were meant to deflect attention from his leadership failures at home, such as neglecting his duty to protect the public from the coronavirus. ...The United States had maintained a fairly consistent foreign policy until Trump. The Biden administration is expected to restore that policy and to work within the rules of international institutions, which I expect will defuse tensions. ...After all, each is the other's largest trading partner, and China has lent more than $1 trillion to the U.S. government by holding U.S. Treasury bills. A rising China may be a threat to America's economic and technological supremacy, but not to its national security, because China doesn't export its ideology or political system and doesn't seek regime change anywhere in the world. ...The real danger is the Taiwan issue. If the U.S. abandons the one-China policy and supports Taiwan's independence, conflict will be inevitable, with unimaginable consequences for the world market."
HBR: "Is a China-U.S. decoupling a real possibility?"
Shan: "Not completely and not without very high costs."
HBR: "What are the biggest risks for China's economy in the coming years?"
Shan: "The economy has grown 36-fold over the past three decades, chiefly because of market-oriented reforms that have created a vibrant private sector, which now accounts for about two-thirds of China's GDP. But the state-owned sector remains too big and inefficient. ...The country will need to continue to privatize its state-owned firms - and shift from investment to private consumption - or it will not be able to sustain its growth."
HBR: "Are you concerned about China's debt?"
Shan: "I see no systemic risk either in China's banking system or in its economy."
HBR: "What is it that Americans don't understand about China?"
Shan: "They don't know how capitalist China is. China's rapid economic growth is the result of its embrace of a market economy and private enterprise. China is among the most open markets in the world: It is the largest trading nation and also the largest recipient of foreign direct investment surpassing the United States in 2020. The major focus of government expenditure is domestic infrastructure. China now has better highways, rail systems, bridges, and airports than the United States does."
HBR: "And what is it that the Chinese don't understand about the United States?"
Shan: "They don't know how socialist it is, with its Social Security system and its policies to tax the rich by collecting capital gains taxes. China is still in the process of building a social safety net that is largely undefined and underfunded, and it has no tax on personal capital gains. In 2020 China had more billionaires than the U.S. did, and it outpaces the U.S. three to one in minting them. Consequently, inequality is greater in China than in the United States, measured by the Gini coefficient."1
___________________________________________
Note:
1 According to worldpolulation.com the 2022 Gini coefficient was .378 for the U.S. and .510 for China. Note 0 represents perfect equality, and 1 represents perfect inequality. For a discussion of inequality in a capitalist system see Thurow, L. C. 1996. The Future of Capitalism: How Today's Economic Forces Shape Tomorrow's World. Chapter 13: Democracy Versus the Market. William Morrow and Company. (Summary). Milanovic also discusses inequality in Capitalism Alone. See below.
Related summaries:
Chow, C. W., F. J. Deng and J. L. Ho. 2000. The openness of knowledge sharing within organizations: A comparative study of the United States and The People's Republic of China. Journal of Management Accounting Research (12): 65-95. (Summary).
Cohen, J. R., L. W. Pant and D. J. Sharp. 1993. Culture-based ethical conflicts confronting multinational accounting firms. Accounting Horizons (September): 1-13. (Note).
Graham, J. L. and N. M. Lam. 2003. The Chinese negotiation. Harvard Business Review (October): 82-91. (How to deal with China. Understand the cultural context of Chinese business style). (Summary).
Milanovic, B. 2019. Capitalism, Alone: The Future of the System That Rules the World. Harvard University Press. (Summary).
Mitter, R. and E. Johnson. 2021. What the West gets wrong about China: The fundamental misconceptions. Harvard Business Review (May/June): 42-48. (Summary).
Thurow, L. C. 1996. The Future of Capitalism: How Today's Economic Forces Shape Tomorrow's World. Chapter 3: The End of Communism. William Morrow and Company. (Summary).
Thurow, L. C. 1996. The Future of Capitalism: How Today's Economic Forces Shape Tomorrow's World. Chapter 13: Chapter 13: Democracy Versus the Market. William Morrow and Company. (Summary).