Post-pandemic powerhouse: China is moving on

Weijan Shan China was the first country to go into lockdown, is also the first country to come out of the lockdown. By the end of February of this year, so by March, more or less life resumed normal, production returned.

Sandra in 2020, normal is different, but China is looking more, well, more normal than pretty much anywhere else. According to the International Monetary Fund's forecasts, China will be the only major world economy not to undergo a contraction in 2020. The IMF expects the US to suffer an 8% contraction in its growth, Australia a negative 4.5%, while the European nations such as the UK, France and Italy, are set to be between minus 10 to 12%. Given the health versus economy debate raging in many countries, it's timely to ask: how did China navigate its way out of COVID-19 and bounce back so quickly?

Hans Hendrischke One point is very much the local connection, the way in which things are run locally in China, which is something that we do not see because it's not something that is either propagated by China and emphasized as part of the policy response, nor is it something that journalists would ever get to see because you don't see it from the big capital cities, but it's rather something that you see when you're actually there.

Sandra In other words, in China, they went microlocal. They stopped the disease with rigid lockdowns wherever outbreaks occurred, and with very regionalised lockdowns, any stimulus, and the Chinese government did not go big with the handouts, was also narrowly targeted and usually locally managed. There was no national job payment scheme, and no big central government spending programs.

Sandra But China is also in a solitary place; as the world's largest trading nation, with a global depression looming, what is China's post pandemic strategy?

Kishore Mahbubani The Chinese have learned that the biggest mistake they made was to build walls, and though China will never again build a Great Wall of China, China realises when they build a Great Wall of China it doesn't protect China, it keeps the world out.

Intro From the University of Sydney Business School, this is Sydney Business Insights the podcast that explores the future of business.

Sandra Hello, I'm Sandra Peter, on this episode of Sydney Business Insights a businessman, an academic and a diplomat walk us through the China recovery story.

Weijan Shan Hello, this is Weijan Shan, I'm Chairman and CEO of PAG, which is a private equity firm. We have about $38 billion under management in real estate, absolute return and private equity, we invest throughout Asia.

Sandra Weijan Shan spent his teenage years during the Cultural Revolution as a peasant laboring in the barren Gobi Desert on the border between China and Mongolia. Today, Dr Shan lives in Hong Kong and runs the PAG group, one of Asia's leading investment firms. His journey from starving peasant to one of the first students from the People's Republic of China to study in the US is told in Dr Shan's autobiography "Out of the Gobi," Dr Shan has lived through the gamut of US/China relations, he sees potential danger ahead.

Weijan Shan I have lived my life in so many different ways, through a path not chosen by myself. So I'm used to surprises, twists and turns. And therefore, I'm not worried about anything. But I just think that if there's a break in that relationship, a certain point, that would harm all of us.

News clips The epidemic is now a top priority for every country. 1 million confirmed cases of COVID-19 worldwide. 10 million reported cases of coronavirus worldwide, and more than half a million people worldwide have… the number of daily infections worldwide has reached a new record.

Kishore Mahbubani It's actually quite shocking how much better China has performed in terms of responding to COVID-19 than most Western governments have. So, for example, the number of people who die from COVID-19, number of deaths per million, in China is less than 10, in most Western countries, UK is about 600, Belgium 600, France for 4-500, US 300. So it's quite amazing how much better they have done.

Sandra Professor Kishore Mahbubani was the first Singaporean to sit on the UN Security Council, eventually serving as its President. For more than 30 years, Professor Mahbubani has been at the centre of world politics.

Kishore Mahbubani It's not surprising to be shocked, because you know, China has underperformed vis-à-vis the rest of the world for roughly 150 years.

Kishore Mahbubani Professor Mahbubani is the author of many books. His latest "Has China Won?" poses challenging questions not only for the superpowers, but also for smaller countries like Australia and Singapore, so often caught up in the friction between the big powers.

Hans Hendrischke I'm Hans Hendrischke, I'm Professor of Chinese business in management at the University of Sydney Business School in Sydney.

Sandra Not many Westerners have been at the inner sanctum of Chinese political discussions, but German-born Professor Hans Hendrischke, served as a translator for China's paramount leader, Deng Xiaoping, during the 1980s. In this episode, these are the minds who are going to shed light on China's path out of the pandemic. Where to for China now, and what does it mean for the rest of the world?

Sandra According to Professor Mahbubani, China's successful strategy is grounded in lessons learned from the episode China calls the "century of humiliation." Starting around the first Opium War in 1839, this period marks China's exploitation by successive foreign powers.

Kishore Mahbubani The Chinese realised the biggest mistake they made, and the key reason why China was humiliated in the century of humiliation, was that they failed to develop modern science and technology. So, the Chinese today have a greater and deeper faith in modern science and technology, and have invested a tremendous amount in it. So for example, in dealing with this pandemic, the Chinese have not tried to use traditional Chinese medicine, they have used Western science and technology to fight pandemic 19. And what is striking is that it is future historians will be quite amazed that the Chinese government paid more respect to science and technology in formulating his public policies to deal with pandemic 19. In contrast to the United States under President Trump, which has actually undermined science and technology, and actually ignored science and technology. For example, give a simple instance, President Xi Jinping would wear masks, and President Trump until recently refused to wear masks.

Weijan Shan The measures that the Chinese government took was quite unprecedented. Around probably about 21st of January, China decided to seal off the entire city of Wuhan, where this virus originated. And the seal off was so tight, in fact, other than essential personnel, nothing could have come out and nothing could go in. And that is for a city of 11 million people. Of course, the entire nation also went into a lockdown and everybody was required to wear a mask everywhere you go.

Hans Hendrischke So China a number of advantages, it could run these policies at a very detailed, local level. So it was not just isolating a whole city with 11 million like Wuhan, but inside those cities and in other cities with a way in which Chinese government's, local governments, city governments operate and the way in which Chinese living conditions, high densities, normally organise, it was relatively easy to isolate very small communities. So that could be housing blocks, it could be individual apartment buildings, it could be streets and so on that they could isolate very quickly, in case they were running into any new cases. That has helped on the health side to focus as much as possible on keeping spreads of the pandemic at a confined level.

Sandra Professor Mahbubani says this strategy has widespread acceptance in the community because…

Kishore Mahbubani Over 4,000 years of Chinese history, the one thing that the Chinese people fear most is chaos. And the reason why they fear of chaos is that people suffer a great deal. And the Chinese people have no desire to weaken their government in the way that the western impulses.

Sandra Initially, the economic impact was crushing…

Hans Hendrischke In the first quarter, to have a decline of 6.8% in GDP growth is massive, because China generally is used to have a positive GDP growth rate of around the same rate. So it is a degree of economic collapse.

Weijan Shan Recovery began in the second quarter, economic growth rate is 3.2% year over year, that is compared with last year, when there was this expectation of a big fall in China's exports, but actually went up half percent. Last month in July, China's export went up 7.2%. so even better than in June, and much beyond the expectation of analysts. So it seems that the Chinese economy is well on its way to recover. Barring any surprises, I would expect this path of recovery to continue for the rest of the year.

Sandra The economic recovery was not primarily due to government financial intervention, because, according to Dr Shan:

Weijan Shan The central government didn't do much, when it comes to a stimulus China probably did much less than other countries.

Kishore Mahbubani The Chinese have avoided going from a massive trillion stimulus program, so the amount involved but quite small, I mean, there's a 2 trillion Yuan package of assistance and a 4 trillion Yuan package of cutting of costs by the government. And that 6 trillion Yuan is less than a trillion US dollars; can you see the Chinese economy is 14 trillion, that's not a very big package, relative to the size of GNP of China.

Sandra And the stimulus kicked in at a local level

Hans Hendrischke Local government can support enterprises and they have a flexibility, which we wouldn't have here. They could, for example, let them forego any local taxation, if we see that our local enterprises are in trouble. And you would even have differences in that, from one county to the next county, wouldn't even reach provincial level. You had a flexible response that was tailor made for specific places.

Sandra With the health crisis under control, things got back to normal, and then?

Weijan Shan People just doubled up their work hours and tried to catch up as quick as possible. We have invested in China, in a number of companies, and we have seen financial performances decline very significantly in the first quarter. But in the second quarter, all the sales and cash flows came back very strongly, very often overcompensating for the declines in the first quarter.

Hans Hendrischke China's rebounding from the COVID pandemic is sustained by their middle classes.

Sandra Private expenditure, not state money, is China's rescue strategy. This is possible because in China, the middle class is…

Hans Hendrischke 500 to 700 million strong, mainly urban, and these are strong consumers, they have fairly sophisticated demands, and they drive demands for local domestic products as well as for overseas imports. That population can be reached now, in terms of technology and digital technology, to a degree that was not possible ever before.

Weijan Shan The size of the retail market, the size of private consumption, the growing half norms, will be the main driver of economic growth and therefore, the source of resilience for the Chinese economy.

Sandra This structural shift in government policy did not happen over one pandemic night. Rather, it was…

Hans Hendrischke Conceived in the end by increasing living standards, allowing people higher salary, putting more money into consumption, which goes against the grain of a traditional kind of socialist, communist economy that comes out of a planning system that was always focused on building up industrial infrastructure. This is a move away from that, to focus much more on consumption that is to, for example, invest money into education, invest money into healthcare, invest money into social welfare, all of these areas contribute quite strongly to a strengthening of the domestic economy. So that's new and combine that with a very strong digital sector that allows a lot of flexibility and a lot of goods and services to flow. You come out with a rather strong economy that depends less and less on international flows, doesn't mean that China is independent from international flows but the the immediate reliance on companies being able to export for example, that has been reduced and so the domestic part of the economy has been strengthened.

Sandra 10 years ago, China's domestic retail market was half the size of the US, today it is $6 trillion bigger than the US's domestic market, and with a population four times larger than the US.

Weijan Shan That ought to provide some underpinning to China's economic growth, if you call that resilience, that is the resilience.

Sandra The Chinese government is famously strong on planning. Its 13th five year plan and this year, and the 14th is expected to be released in 2021. What is not as obvious is Beijing's ability to pivot policies with considerable flexibility. According to Dr Shan, China has a new economic strategy. one it hopes will inoculate the country against the coming global depression.

Weijan Shan The only thing coming out of Beijing these days is the idea of two circulations. What it means is that China's economy is very much integrated with the rest of the world. China is the largest trading country in the world, and therefore the Chinese economy was considered very much part of the world economy. But given the pandemic, given the trade war, and the conflicts with the United States, now, it seems they're suggesting that you should focus on the big domestic market, this circulation number one. And the second circulation is to keep the open door policy and try very best to continue to interact with the rest of the world. That's kind of the external circulation. So it's the Chinese way of saying, you know, we need to develop the domestic market, we need to promote domestic consumption, at the same time, we should not neglect or pay less attention to the external market.

Sandra In his book "Has China Won?" Kishore Mahbubani says that there is a new world order on the way. America, he argues, knows its strengths, but not its weaknesses. And worse, the West knows China's weaknesses, but not China's strengths. Above all else, Professor Mahbubani predicts:

Kishore Mahbubani The 21st century will be the Asian century, that this is again the result of deep structural forces because the East Asian societies don't believe that they have arrived. They believe they have to continue to struggle, they live with a deep sense of insecurity, and insecurity and paranoia is a very powerful motivating factor in human behavior. Whereas the mistake that the United States and Western Europe made, especially after the end of the Cold War, they believed that they had arrived at the end of history, the quote the famous essay by Francis Fukuyama. And sadly, that essay did a lot of brain damage to the West, because it put the West, especially Europe and America, to sleep at precisely the moment when China and India were waking up after 200 years of slumber.

Weijan Shan I don't know about that.

Sandra Dr Weijan Shan

Weijan Shan I'm not so keen to give labels to anything, But there's no question in my mind that the economic growth in China will continue. As the rest of Asia, there is every sign that this trend will continue.

Hans Hendrischke I think you can make a strong point to say yes, in fact, we are facing an Asian century. And of course behind that is simply the population numbers, the numbers of consumers, the number of users of all kinds of technologies and so on, that will be concentrated more in Asia than in the European or American space. But that doesn't mean that China in the end has won that game.

Sandra for Professor Hendrischke, technology remains the game changer. And in this area, China does recognise the strength of the West. China has declared that by 2030, it wants to be the world leader in artificial intelligence.

Hans Hendrischke The internet was invented in the US it has changed the whole world in a space of bit more than 20 years. So the Chinese see that, there are things that could come out of the really very strong creativity and the basic long term research that brings breakthroughs in western countries. So China wouldn't want to lose on that, and I think China is not yet in a position where it is really leading in the sense that other countries have to catch up, US is leading in a whole range, is leading in finance, is leading in all kinds of service areas. Europe is still leading in a whole range of manufacturing areas where China is catching up. But, China is not yet at the stage where it actually can direct the trend of these developments. So China is in a position to apply those technologies to reproduce them to sell them into other markets, into Africa into developing markets, or their Belt and Road countries. But it's not yet in a position where it could actually decide where technological developments and new ideas, and new markets are actually going. That is still very much the domain of western countries.

Sandra Australia and other countries that are not the US or China are nevertheless caught up in their conflicts over trade, intelligence, and potentially worse.

Kishore Mahbubani China's relations with some of his neighbours has gone down in the past year or so, it has gone down with Australia, it has gone down with Canada, it has gone down with India. So I think China has got to sit back and ask itself, what it can do to stop this slide in its relations with its neighbors, and major geopolitical contest is broken up within the US and China. And that will be the defining force in global geopolitics for the next ten to twenty years. And the best way for China to manage this geopolitical contest is to improve its relations with other countries in the world.

Weijan Shan But I'm worried about a break in diplomatic relationship, and worried about conflicts, including military conflicts, and worried about the separation of markets, which will lead to a global recession and collapse of financial markets. All of which, at this point, seem to be within the realm of possibilities, I wouldn't rule any of those things out. Whereas even a year ago, I wouldn't even have thought about it.

Sandra And a year ago, no one was worrying about a pandemic. Even if a vaccine becomes available, the disease has exposed failures in states' capabilities. China has led the way out of the pandemic, so far, at least not with a cure, but nevertheless, with the liveable solution. When will a resolution to the world's deeper threat emerge?

Kishore Mahbubani China has not actually used military means to exercise its power. So we should encourage China to not use military means, we should encourage China to keep on using other means, and we have to adjust to Chinese power. You have to accept it, this is the reality of geopolitics. I've studied geopolitics for 50 years in my life and the biggest lesson of geopolitics is that whenever a great power emerges, everything changes. And you cannot say "oh, that's the word I got used to before. I'm going to live with that world," that world is gone.

Outro From the University of Sydney Business School, this is Sydney Business Insights.

Sandra This podcast is part of a multimedia China special. Each of our interviewees, along with Professor Xian Chen from Shanghai Jiao Tong University, have also contributed an article on how China navigated the pandemic and what this means for future economic and other relations. You will find the essays along with reference material on our website at sbi.sydney.edu. This episode was researched by Jacquelyn Hole and Kishi Pan, produced by Jacquelyn Hole and edited by Megan Wedge.