MMA talk on China 1 Strategy - Part 1

0:00Thank you, Mr. Starran, for delivering the formal welcome address. Now, we need my proud privilege to formally introduce all the three distinguished speakers for this evening and May the evening. Dr. K. C. John is a technology entrepreneur, educator, mentor and independent director with 30 plus years in innovation, entrepreneurship and sustainable development. Dr. John has built and exited ventures in mobile computing, VIPs and health tech and work with Qualcomm, the World Bank and the Ford Foundation. A PhD from IIM Ahmedabad, Dr. John serves on the boards of Kaplan Point Laboratories and Kaplan Starrans, mentoring first-generation entrepreneurs.

1:04Dr. P. S. Shreenivas Shreeni is visiting research professor at the East Asian Institute, National University of Singapore, specializing in China's financial sector. Dr. Shreeni previously worked with the new development bank, the World Bank and the Asian Development Bank and taught at the Indian School of Business. Dr. Shreeni holds a PhD from Cornell University and MBA from IIM Ahmedabad and B. Tech from IIT Madras. Dr. Frank N. Pete is a Dutch cultural anthropologist and expert on modern China currently visiting research professor at the East Asian Institute, National University of Singapore. Formerly director and CEO of Merrick's in Berlin, Dr. Frank has had academic positions at Oxford and Ladin. Dr. Frank's

2:06research explores China's global impact, migration and the transformation of the Chinese Communist Party. Ladies and gentlemen, a warm round of welcome to our Disciples time. I mentioned to you earlier after John setting the thing, each of the speakers will share the insight thereafter. There will be a lovely free flowing conversation and Q&A session. Now, Eric, could John technology entrepreneur to please send the contact and take it forward? You would like to do it from there, you have a lot of work to do. Thank you, group captain, Vijay Kumar. It's always a pleasure to collaborate with you, Mr. Lakshmi Narayanan, friends. We meet at a defining moment for global supply chain. What started as a cautious China plus one hedge has now

3:08become a core element of global industrial strategy. The world is actively looking for reliable, resilient, high quality partners. And the big question before us is, can India truly step into that role? Not just as a cost alternative, but as a trusted global partner, built on quality, reliability and innovation. Despite geopolitical tensions, India's trade with China continues to rise, and we are just crossed US$100 billion as a trade deficit. That shows that we have to view this both as a vulnerability as well as an opportunity. If India must become a serious plus one player, we need to confront capability gaps, upgrade ecosystems, strengthen supply chains, and rethink our

4:10value propositions. Our distinguished panel members, you saw them that they carry with them a long devotion to the Chinese expert, Chinese affairs, and now they are looking at India from a fresh angle. We all look at it from a biased perspective, but they come and look at it. What could be done and how it could be done? So they have been in India for about two to three weeks. Initially they spent some time in Delhi National Capital Region, and for last one week they have been in Chennai, and their focus has been to immerse in India. They have talked to series of policymakers, policy administrators, and corporate captains. And the idea is that they have distilled what's happening and how it is happening. Their research is still evolving, and they look forward to sharing early findings and pose some questions to you so that you can reflect on that.

5:11So let's make it an interactive session, provide more feedback, and help in terms of what are the areas we still need to be probed and investigated. So that's the context in which I thought we look forward for the expert view on what China is currently doing, where China's strengths are, China's weaknesses are, and how China and India could work together despite the entire inherent disputes which we run into. Thank you very much for coming, and we look forward to encouraging and looking at stimulating questions, because the more questions you ask, the experts would be willing to put their thinking hat and respect and respond to that. Thank you very much. Well, request Dr. P. S. Finiwas to come and tell us a little bit about the research project, and then we will request Frank P to come and do the

6:15presentation, and then subsequently Dr. Siniwas would come and do the presentation and provide the conclusions in terms of what they have learned so far, what are the areas where they still need answers, and then it would be open to discussions. Thank you very much. Good evening, ladies and gentlemen. It's great to be here with all of you this evening, as Professor John mentioned to share some of the findings of what we have done so far, and more importantly to get your thoughts and feedback on what we are doing. This is very much work in progress, so we don't have any final conclusions yet. First of all, I'd like to thank the Madras Management Association and its partners for inviting us here. Thank you in particular, Mr. Lakshmi Narayanan, Professor John, Group Captain Vijay Kumar for inviting us here. I appreciate it very much. Thank you. So, how do I get the slides up here?

7:21Thank you very much. From China to at least one additional country, the idea is not to abandon China, which remains

8:24a critical manufacturing hub, given its established infrastructure, its scale, and its role in the supply chain ecosystem, but the idea is to reduce the overreliance on it. And this strategy helps companies mitigate risks associated with geopolitical tensions, rising labor costs, supply chain disruptions, and some of the regulatory uncertainties that are increasing in China. At this shift began during the first Trump administration, and then COVID-19, as was mentioned earlier, significantly accelerated this process. Some of you in business may have experienced delays during due to factory shutdowns in China during COVID, post-port congestion, high shipping costs, etc., all of which exposed the fragility of single country's concentrated supply chains. The policies of the subsequent U.S. administration's only added momentum to this China plus one shift. Some recent

9:28surveys basically show that 50 percent or more of multinational companies currently in China have either already implemented or are implementing China plus one strategies and about a quarter of the Chinese companies are doing the same thing. And typically, kind of criteria that companies look to where they want to move to, and this is relevant for India, include things like production costs, obviously political stability, the ease of doing business, something that many of you here may be aware of, incentives, for example, the productivity linked incentive in India, and the attractiveness of the domestic market in addition to its base as a export hub. Many companies are considering Southeast Asia and Mexico. We wanted to ask the question, what does this shift mean for India? That is why we started this research. We wanted to ask, is India attracting global firms as part of their China plus one strategies?

10:31If yes, great. What's actually happening? Why is it happening? And if not, well, why is it not happening? This is what we wanted to understand. What are the views of policy makers? What are the views of the industry on this particular issue? And it's, so this, in a sense, motivated our research. Now, as part of the research over the past few months, as was mentioned by Professor John, we met business representatives and policy makers, and one of the things that we realized as we got into this is that it's not just focusing on China plus one, but it's also important to understand the overall India-China economic relationship context. And that obviously is a many, many faceted, many-dimensional issue. So that's basically what we are trying to get to the bottom off. And as we did these discussion, have we, as we had these discussions, we asked policy makers lots of questions,

11:32businesses lots of questions, and they had lots of questions for us too. And they wanted to know what, or wanted us to share a little bit of what we knew about China, what we knew about this. So we thought that's where we'll start this evening's discussion. Frank is going to put together some of the, you know, discuss some of the recent politically political economy issues, which hopefully would be of interest to you. These were of interest to a lot of the people that we discussed. And then I'll come back and talk a little bit more about the economy, and then tell you what it is that we found so far, and what we have raised some questions for you that we can hopefully have a discussion over. Frank, over to you. Right. Thank you very much for being here today. This has been a great pleasure to be here, also because I'm at least partially Indian, my wife is Indian and I'm an OCI card holder.

12:33So India also feels like home to me. Let me just see how this clicking work because it's always a bit tricky, right? Yeah, okay. This is me. This one. Yeah. So it's very hard to read, tilt it a bit. So what I will do is take you through some of the more, let's say, important aspects of China's political system followed by an overview of recent developments in the Chinese economy and economic policy. Before screening, again, takes over to start talking about trade and investment for trade and investment. So we have had now or we currently in the third Xi Jinping administration, and all three of them have been fairly different from each other. So in the first administration starting in 2012 through 2017, she was really trying to find

13:34a middle ground between very different opposing forces within the Chinese Communist Party and in Chinese society, trying to establish his loan term credibility and power base and his cabinet or his leadership in the Politburo was really a compromise of very different groups within the Communist Party. Now, in the second administration that radically changed and he was able to get rid at the end of his first administration of his most important, not the most opponents with people that were critical of him and more importantly that we're not really beholden to him. So very could really establish his grip on the party much more on the Chinese government's system, building and centralizing the party even more than he had done during his first administration and imposing what he himself called top-down planning on a system that is really very decentralized and where provinces and below provinces, counties have a mind of their

14:36own, have a budget of their own, have ideas of their own and agendas of their own. So that's still a project that is by the way going on but the real crunch came I think between 2015 so at the end of his first administration and 2019 roughly. Now going into his third administration, he had been able during the party congress in 2022 to fully get rid of anybody that would even think about saying things that might possibly be critical to him. The people that were appointed in that administration were all personally loyal to Xi Jinping himself. So this is a crucial fact and we hadn't expected that in the East Asian Institute. We expected a more sort of compromise administration but what in fact happened was that all the other groupings in the Communist Party usually called them factions. So groups of people that are beholden to a particular leader,

15:38only opposing factions or the compromises between them had been thrown out of the window, Xi Jinping felt himself secure enough to now only appoint to let's call him his cronies. The people that he had accumulated over a very long career all across China and from very different parties trying a very different party administration with very different connections to Xi but the main point was they were all beholden to him. They all owed their career to a very large extent to Xi Jinping himself. And what then happens and I have to say a few things about that is that there's new group of people that seem to be uniform and all loyal to Xi immediately start fighting with each other because they are different and they have their own agendas. They're trying to, as it were, find ways of promoting their own careers and the careers of the people that are beholden to him. And very soon this new, an algorithm of leaders

16:39starts breaking up in different new factions. You may have heard them of them, the most notorious ones of the more. Well, none of them are the Fugian faction, both one in the army and another Fugian in the party in the exit different. Then there is the party from Shanxi which is the problem where Xi Jinping's father is originally from and where Xi Jinping spent a lot of time. There's the Shanghai faction, there's the Zhang faction and so on. There are about four or five of them and we are now at the stage and it's important to say that these factions are fully outcrystallized out and are openly vying for position. So now it's up to Xi Jinping to keep on balancing this. Very tenuous constellation and he does that and that's also the background of many purges that you hear about because he has to purge people that try to now get a leg up on their opponents or their rivals in the leadership from other factions and they do things that Xi Jinping

17:41doesn't like. So he constantly has to punish people that try to be a little bit too autonomous and try to pursue their own agenda a little bit too much and that's why I have all these purges going on at the moment. We are at the end of what I call an authoritarian leadership cycle where ultimately Xi Jinping will be the only person with just five or six really trusted people around him that make all decisions and hold all the power. That's just sort of very, very nicely at the most recent fourth pleaning or plenum of the central committee. I call this actually a Chinese version of Stalinism. That's really what it boils down to. So this endless cycle of purges of factionalism and a leader that becomes more and more alone with just a very few trusted people around him. Now what does he want to do? The fourth point here on this slide. His focus is very strongly on national strength, national security and security more general and competition with the

18:45US. So in the beginning we came to power with an idea. One of the things we have to do is avoid the mistakes of the past made by his predecessor Hu Jintao. We have to really focus on getting out of the middle income trap. So we have to really ensure that the Chinese economy is built up and is prepared for a long-term leak into a high level that became predominant to his economic agenda. But just as importantly, of course, national strength and national security. Securities very quickly started dominating particularly after the US-China conflict started to escalate. And that conflict has actually accelerated processes that took place in the Communist Party's leadership already. So there were very much focus on national security, very much focus on national strength and so on and so forth. But the competition with the US put it in sort of an overdrive because now there was a real challenge and a real problem and they had to stay ahead of it.

19:48And if you want to understand why they're doing what they're doing, this is how it worked. And this happened, this shift happened roughly around 2017, 18, 19, with the first Trump administration. So let me move to the second slide. So that is Chinese politics. I mean, this is just a, well, it's a seven-minute overview of Chinese politics. I can give all lectures here as well, but I shan't do that. Which is because you get bored. Let's now move into the economy. So we all ask ourselves over the question, what is the secret of China's economic growth? How did it grow up? How did they manage to do that? And the answer is we still don't really know. It's still a little bit of a miracle or a mystery how this exactly happened. But one thing is absolutely certain, somebody's phone is ringing. Probably in their bag or something like that? Okay, thank you. So the first thing to say is that China's real growth happened in the 1990s

20:542000s. That was a period in which geopolitics was very much in China's favor. China had a very good relationship with the United States, particularly after the Tiananmen issue had been resolved. Let's put it this way around 1997, 1998. Globalization was the worst, the buzzword of the day. There was no geopolitical tensions between the Soviet Union and the US anymore. So China had as a unique moment to fit itself into the global economy without actually meeting any resistance, maybe any opposition. In fact, it was helped. It was celebrated. The world system with the US in the lead was really helping China, allowing China to get into the build system. There was a really important aspect of this. But it's not all. There's also domestic things. The key thing I think, and it's often forgotten because it is now something that is all over so relevant, is that local government for

21:55a very large extent was responsible for economic growth, also to generate their own incomes, to generate local jobs and so forth. And they were giving the room to start policies and to help companies develop and grow. So this happened at the village level and I've seen it myself in the 1980s, particularly in 1990s, how people with basically nothing at all grew conglomerates of enterprises virtually within, say, four or five years. But that was only possible because the local government allowed them to get them credit, they gave them land, they gave them access to labor, and so on and so forth. So I think the early start of China's growth, Miracle, you have to look at the most local level to really understand what was happening. After that happened, then the leapfrog into the world happened at the late 1990s, early 2000s. But both are just as important. And the mistake that a lot of people make is saying, we let China grow,

23:00we let China do it all of this. No, China was already ready for it and had prepped itself to take full advantage of the opportunities that were offered with the accession to the WTO. Another very important thing is foreign investment. Foreign investment was not simply seen as money, free money coming in, but very deliberately local governments used foreign investment to create ecosystems of smaller companies that were supplying that, that investment, that factory of a foreign company. So very quickly, these companies, these Chinese companies that grew up around it, started copying what the main foreign firm was doing, getting better at it, and then ultimately, after about five or ten years sometimes, they became that foreign investment competitors, and they competed so well that quite often these foreign firms were squeezed out, and had to look for other things to do that. So this is China's ability to first

24:01accommodate, then copy, and then overtake foreign companies for investments. That's a very important factor, and this was all encouraged, stimulated, allowed, and facilitated by local governments. China believes in the market economy, but it doesn't believe in it as full-scale capitalism. So when you read through the documents in the 1990s, 2000s, even now, you see that the market is central, the market is the most important way of running the economy, but it should never become a capitalist society, a capitalist economy, like you have in the United States. They're very, very clear about that. So the market is always a tool, is a facilitator, but can never be a decider, and that is a red thread that runs through all Chinese government, but is now becoming particularly visible. You also see this in the relationship between state and enterprises,

25:03SOEs, and private enterprises. You see that private enterprises are good for the bulk of the Chinese economy. It's somewhere around 80, 60, 70 percent, and state enterprise is only 20, 25 percent. Nevertheless, state enterprise remains leading. They will remain the pillar of the economy and the pillar of the governments and the parties control and grip over the economy, and that will not change. That explains what happened with Jack Marffron since in 2019, when he suddenly disappeared, because he got a little bit too lippy for a private entrepreneur, and he was told he know in certain terms that that was not the idea. He was not in control, and he was not allowed to actually tell the Chinese Communist Party what to do, which is what he tried to do. Now, that long-term growth model is running out of steam. Has been running out of steam actually from about 2015, at least, if not before, and I can say a lot more about it than I won't, and increasingly China has had to

26:03move to another growth model, which even more reliant on SOEs, state enterprises, more explicit industrial policy, where winners are picked, and in particular sectors are selected for further development, high-tech sectors usually, and very importantly, quite often for government, and China will be able to say more about it, I'm sure, financialized steerage. So, increasingly, the Communist Party started believing in the power of the financial market as well, also the financial system, as a tool, as a way of allocating resources all over China's society, leveraging also the state-owned assets through the private sector, through the financial system, and that is something that really has taken a great flight. The China Communist Party is now almost exclusively reliant on financialized measures to steer and control and direct the economy. It's no longer a planned economy, there's no longer a fact that the Communist Party says,

27:05do this, and everybody does it. Now, they create the financial conditions for firms to make the decisions that the Communist Party wants. There's even a further spin to it, and that is that the Chinese government increasingly is also an investor state. It is dependent for quite bit of its income on its own investments, and that is particularly true at the local level, the provincial level, and we know that these governments have often for a fairly large chunk of their income are dependent on the portfolio investments or ownership of companies and stock. That shows how capitalism is a tool for communism, as well. The two are fused in the Chinese Communist Party's vision of China. Now, after 2020, is that there has been a much greater focus on what is called the real economy, which I think

28:06is highly unfortunate, but the real economy is used as a self-evident thing, but it really means we don't want to spend time and money on things that you can't hold in your hand, but aren't really materials. That includes also software development and things like that. So what they say is we don't want the further US that started to rely more and more on the services sector. That's a waste of space. That's a waste of time. It's good for the people, but it's not good for China. They put it bluntly, and then they point to Japan, they point to Korea, they point to America, and in Europe, as having gone down that wrong path. We have to focus on really economy, we make things that are real, and that add to our economic strength. So that means that China is focusing, as we probably all know, on high tech development, innovation, and labor extensive investment and sectors. So what China does really is,

29:12and I'll come to that probably later, but is splitting the economy in two bits. So you have the high tech sector, you have the big enterprise, big private enterprises that are pampered and that are allowed to grow by the state and by the party, and they have the rest of the economy that is falling behind, where people are maybe unemployed or under-employed, finding very hard to pay their bills, that have really no way out. And that is, I think, the core factor aspect of China that is quite often forgotten. We look at the glittering price anywhere, we say, yeah, they could all these economic problems and other problems, but you know, that's by the buy, but these economic problems, they come from something really fundamental, structural, and that is the dualism in the China's economy. And that is very much encouraged and fed by what I call super powering of the Chinese economy. Harking back to this point, it was made that the U.S. China competition was leading more and

30:14more, was accelerating this innate drive towards making China strong and resilient and self-sufficient. And that means that living standards are suffering at the expense, so that China's growth and China's strength is increasing at the expense of the population. So now this is not what I wanted. Yes. So this is what my last slide, just I'll go through very quickly and then I'll hand over to Shreeni again. So what at the moment are Chinese economic strengths and weaknesses? The main strength, they're pretty obvious, most people will know them, but the unparalleled industrial capacity, and Shreeni will say more about when we talk about trade in particular where that is glaringly obvious, nobody can do without China anymore. It has a truly excellent infrastructure that is not just roads and airports and things like that, but most importantly perhaps electricity. China has a huge capacity for generating electricity

31:22that is more than enough to generate further economic growth. And that is the key sector. China will be the first fully electrified economy in the world. It has to be with generation of power, it has to be with distribution of power, so high voltage lines all over the place, battery storage for electric storage, and EV production, smart roads that are fully electrified, and so forth, and so on and so forth. I think that's the key thing to understand if you want to know where China is going. It will be an economy that is unrecognizable to Indians, to Europeans, to Japanese, even, and to Americans, because it will be fully electrified, and they'll have ample of electricity to develop further AI tools and things like that. It's a very, very important thing. And as I said, there's a strong innovation capacity that is getting stronger every day that is producing new technologies, new products for essentially 2030s, 2000, 40s, 2050s. Another strength that I should mention, everybody, knows that it's important, China is a long-term view.

32:25It doesn't look at what's going to happen tomorrow, but they look at what's going to happen in 20 years from now, 30 years from now, and that continues. In fact, it's kept strong, but there are prices to be paid. The main weaknesses. So the overlays of manufacturing means that services are neglected, that with that employment suffers, because most employment is generated in the service sector at the end of the day, not in the industry. So people lose out. There's nowhere to go, because industry is not hiring, because it's all being run by robots and automation and all that. That means growth is depressed, because the one thing that I always say is, we should not spend as a government to increase living standards and to generate growth, but investment should follow that generates growth and that generates higher living standards. So it's essentially an investment driven supply side philosophy about China's future and China's

33:30economy that still remains very much at the heart of what they are doing. Now, this leads to evolution, a wonderful term that I can say a lot about, because one of my students, former students, was involved in developing this term. It means that there is too much redoublic duplication in the Chinese economy and China political system. Everybody doing the same thing leads to huge bases, as you see with solar panels and with electric vehicles at the moment, but it also plays out in other sectors. And we all know, of course, that China's very high debt. Now, isn't the highest people say, the total debt of China is about 300 percent of GDP, that's a lot, but it's not public debt. That's also hidden debt in companies, in funds, investment recovery, pension funds, and things like that. So public debt is actually still manageable. The central government in particular is still doing rather well, because they have offloaded all the debt to local governments. So only 24 percent of GDP is the total debt of

34:34the central government. So the ample room to increase that, and that's what they should be doing, but they're very stingy about this. The total debt of China's government, local, and central together is about between 88 and 120 percent. Have you take your pick, because these figures are really, really soft, and nobody really knows what they mean, but it's somewhere in that range. And the budget deficit, as I show here, is between 9 and 11 percent of GDP. Again, a range, because they don't really know what's going on. We have a specialist in our institute. We spend our entire life on China's public debt and public finance. She can't figure it out. Not really, right? So let alone simple anthropologists or finance guys like us. As we all know, there's also an excessive dependence on exports, as we all know, and we'll talk about that a little bit more after this. The dual economy also said, so what China does is there's

35:35both a transition into a high-quality economy, but also the rest of China is stuck in the middle-income trap. And that is something they don't really have a solution for. They don't want to think about it too much. So I think I'll hand over to Suni now, if I'm mistaken. Yes, these are some slides that I won't talk through, because it takes too long, but they illustrate, particularly this one. It shows that services that rule employment is remaining the same, we're getting worse, but particularly this slide is very, very telling. It shows you that after COVID, services didn't grow like a normal economy would do, now what the service sector was depressed, because many people working services sectors couldn't get a job anymore, because there was no consumption, there's no expenditure, and also people were sent back to the countryside quite often who were doing things in the service sector, and it's that industry state at the same level.

36:36So to me, this is the most telling of all about the structure, the contemporary structure of China economy. Big China, yes, no, we don't know. The Chinese say no, the Americans say yes, I say one bit has peaked, but the other part keeps on growing. So I'll have to I can't talk to this, I said most of the things on these slides already, so I now hand over to Suni again. Thank you, Frank. I thought I'll pick up, you've seen some of the developments, recent developments in the economy, Frank has told you a little bit about the politics. I thought I'll just cover a couple of issues before I get into what it is that we have done, and what we have found in our discussions. And the first one is a little bit getting into a detail of what Frank touched upon, which is debt. He mentioned the debt fuel economy.

37:37This is on the left hand side of this shows you how debt fueled it is. The blue line, the right on top, that's China's total debt, roughly 300% of GDP. I put in the US there as a comparison, that's the red line in the middle, and the bottom green is India. Just to show you the difference in the leverage of the economies. And in terms of the bars, just to show you pick any one, let's say I picked the left most bar, the light blue line is China's central government debt. The next one, the yellow one, which is an important thing to focus on, and which is the one that grows the most over the last 10 years, that is the local government debt, or that is the corporate debt. It basically includes all local governments, private sector corporate, state-owned enterprises, everything else, so that's there. And the little brown one on the top, that's household debt. So, and for all the three economies, that's the comparison for India, the dark red line right

38:37at the bottom, that's the central government debt, the next colors, let's call it dark brown, I guess, that's the state governments and corporates, and then the little black line, that's the household debt. So, it shows you that it's a very leveraged economy and with leverage come risks. So, it's important to keep that in mind, and given that this is, you know, many of you are in the business side, I can't talk about debt without talking about equity. So, I put the equity on the right side, that shows you the market cap as a share of GDP, I know market cap is not a good measure of all the equity in the economy, subject to market fluctuations, all of that caveat, but still, that shows you where the green line on the right side, green bar, that's India. So, it's India has much more equity in its economy than China has, which is the blue line. So, this clearly shows you, you know, to what extent there is, there are, you know, sort of the differences in the way the two countries have chosen to finance growth, and this is important in terms of understanding the overall context between the India-China

39:42economic relations. Now, I'll just talk a little bit about trade, and the trade, this is the trade imbalances or the global, how countries are faring and global trade over the last three years, ending in 20, 24 December, the light blue lines at the bottom is the Yueyu, is the Yangtze of the