The cold air greets my face as soon as I step out of my office. It is again that time of the year, where Christmas trees become the centrepieces in malls, and businesses wind down to take stock of the year that has passed, while gearing up for the next.
I hop in a taxi and lean back into the seat as the vehicle cruises past rows of indomitable skyscrapers that make modern Shanghai. Outside, even in the cold, people have their hands constantly busy with their mobile phones.
How China has changed.
The country last year celebrated 40 years of Reform and Opening Up (改革开放), during which it rose phenomenally to become the world’s second biggest economy, backed by the likes of tech behemoths Alibaba, Huawei, and Tencent, among others. President Xi Jinping has termed the reform drive as “China’s second revolution” that has not only profoundly changed the country but also greatly influenced the world.
But all of that is to be capped by a drama-filled 2019, to say the least.
Even as China marked its 70th anniversary of the founding of the People’s Republic, its bitter trade war with the United States drags on, amid slowing growth. And then there is Hong Kong, which has been engulfed in violence that underlie deeper unhappiness with the “one country, two systems” formula.
So what’s next for China?
A second round of reforms
China did attain dizzying levels of success during its four decades of reforms. But this undertaking is not yet complete. To truly become the world’s largest economy, work must continue. China needs yet another 40 years of Reform and Opening Up.
Let’s start with the local companies. Huawei is a great role model of the “Made in China” ideal – of how a Chinese home-grown player has developed its 5G technology and grown into its own as a global leader, dealing a blow to traditional US tech giants that are now struggling and clumsily trying to adapt to the new world order.
But China only has few such “Huaweis”. More Chinese companies need to start playing by the rules of the global economy, find their niche and expertise, and learn how to be competitive without relying heavily on government help or subsidies, which can cripple real innovation.
Trust also needs to be built. Firms that want to move beyond the borders often face severe roadblocks when it comes to the transfer and exchange of technologies, ideas, or talent. Huawei has not been spared.
Chinese companies need to work on their market entry, adapt to local culture, and respect domestic market customs as they expand globally. Working with partners that understand the intricacies of specific markets can make the process much easier.
This need to align with the inner workings of the global economy extends to the government as well. Look at China’s Belt and Road Initiative (BRI), a bold plan to recreate a modern-day Silk Road through Asia and Europe through hundreds of infrastructure projects. It has drawn sharp criticism for poor standards and a lack of transparency.
China needs to capture these opportunities delicately. One way it can do so is by helping countries get up to speed in areas where it is a clear leader, such as telecommunications or mobile payments, and create real engines of growth for their economies.
Finally, the issue of Hong Kong needs to be addressed. The recent spate of events has surprised many as to how a stable, vibrant city – and for most firms, probably the only familiar and safer gateway to the West – could descend into chaos so quickly.
Businesses and investors have lost confidence in the financial centre. Add to that a Hong Kong that contributed just 3 per cent to China’s economy in 2018, well down from 16 per cent in 1997, before the handover.
Does that mean China should give up on Hong Kong?
No. In fact, it needs to do the contrary. Hong Kong’s role cannot be underestimated for a number of reasons:
Hong Kong is the largest foreign exchange settlement centre in renminbi, handling over 50 to 60 per cent of the world’s total renminbi trade. It serves to facilitate the tight capital controls put in place by the central government, which has allowed the renminbi to remain stable vis-à-vis the US dollar, unlike the currencies of other large economies.
During the early days of Reform and Opening Up, more than 90 per cent of foreign direct investment flowed to China through Hong Kong. Today, it remains the largest gateway of such investments, accounting for over 50 to 60 per cent of total inflows and outflows.
Hong Kong has been – and continues to be – instrumental in the fundraising process for Chinese companies over the past decade, having raised an average of US$100 billion a year for these firms through venture capital or private equity investments, or through the Stock Exchange of Hong Kong.
Hong Kong is the gateway to the largest group of beneficiaries of the BRI: Southeast Asia. Without Hong Kong, Chinese and ASEAN businesses alike would not be able to move so quickly and seamlessly through the legal and economical hurdles typically present in cross-border operations.
As veteran financier Chen Shuang, Chairman and CEO of CIMC Capital Holdings and former CEO of China Everbright Group, aptly put it at our recent Asia Investment Conference in Shanghai: Hong Kong is a crucial minority (关键少数). Its importance cannot be overlooked, much less ignored.
The current situation may be tricky to navigate, but China will need to take a long and hard look at how it can effectively solve the issues at hand, because whether the country will continue to thrive may very well depend on how it deals with this.