How China's easing of COVID restrictions affect the world?

As China has loosened its COVID-related restrictions, life, work, and production are getting back to normal at a faster pace. How would the optimization affect China's economy? Will China's easing of COVID response be a booster shot for the slowing-down global growth and supply chain? 

Our guests from business and academia share some insights. 

Bertrand Regnier
EY Partner / French Business Network–Global Head 

Josef Gregory Mahoney
Professor of Politics and International Relations, East China Normal University

Transcript

 How China's easing of COVID restrictions affect the world? 

【You Zhixin】 
Hi guys. Welcome to China trends. Let's stay on top of trends shaping our future. My name is Yoyo and I'm your host. Today we are glad to invite two guests to share their insights on Chinese economy and some inspirations for multinational companies that want to succeed in the Chinese market. 

【Bertrand Regnier】
 Thank you for having me today. It's a pleasure. My name is Bertrand Regnier. I'm a partner from EY. I come from France. I've been in China and Shanghai, especially since 2008. So, it's been a long run. Thank you.  

【Josef Gregory Mahoney】
 Hi, I'm Josef Gregory Mahoney. I'm a professor of politics at East China Normal University here in Shanghai. 

【You Zhixin】 
So, the first question is that what's your view with the current situation about the Chinese economy?
 
【Bertrand Regnier】
 Yeah, so, first I will mostly discuss today about the foreign investment in China, which is mostly the clients I help and I represent. Slightly, a few also on the Chinese investment abroad. I would say overall in the business community, we are all very happy to have put 2022 behind to start fresh with the new announcement that have been made, which two of, you know, will help moving forward after 3 years that have been quite complicated from a trade and economical point of view. 

【You Zhixin】 
I just have mentioned the world is kind of complicated. And also people are concerning the slower growth. I know it's a kind of like hard to predict, but I like to  ask that what's your prospect for China's economy for this year?  
 
【Bertrand Regnier】
 So, I mean again, coming back from 2022, which has been... what it has been... I would say it's very difficult to predict something that could be as complicated, right? So we are all hoping that the reopening of China, the reopening of the trade between countries will really help. Because it's very clear that the foreign investment in China is quite important for not only for China, but for the foreign companies and that foreign companies are willing to help China to grow into a qualitative way and also to help in the development with the priorities that the government has put together. 

【Josef Gregory Mahoney】
 I think it's clear that the government wants to pursue some consumption-led growth. I think that we could expect some pent-up demand to really help drive things. But at the same time, we should expect the concern of the first quarter feeling the effects of trying to get to stabilization. And then secondly, whether or not China is going to encounter like the rest of the world may, a global recession, and whether or not that's going to put some downward pressure. But I think that what we'll see are some very intelligent policies from the central government. I think what we're already seeing is the indication that they're going to promote a higher level growth and some key driver cities that help really lift up the overall national growth. So I think that I'm optimistic that the back half of 2023 will be good. I think 2024 would be good. But more importantly, I think that as we may see, a world economy struggling, that China may, as it did in the following the first contraction, due to the pandemic that China may lead the global economy forward, given its capacity to do so institutionally. So I’m optimistic.
 
【You Zhixin】
 When we talk about the Chinese economy, there's a keyword - supply chain. So I wonder that according to the EY and also from the aspects of your clients, have you observed the different multinational companies, their allocation in China and also in the world? Is there any changes? 

【Bertrand Regnier】
 From a supply chain point of view, I think our vision is quite clear. Basically, when we discuss with our clients, they have a global vision, basically on supply chain, right? And they need to think also a long term. And it takes a lot of time to rebuild and to make some decisions that will impact their global supply chain. It is very clear that I will separate the pandemic into two steps. The first step or the first stage was what happened in the year 2020 and in the year 2021. When basically the engine, the supply chain engine was in China and 2022 again with what has happened, the situation has been more complex. So again, we believe that with the recent announcements, the global supply chain will not be as impacted as it could have been the case at some point I'm talking about China. Also due to the fact that there are some very, very strong ecosystem in terms of supply chain that are very difficult to transfer out, right? When you think about the chemical industry, when you think about the automotive industry, these ecosystems are so much embedded into the China industry that the strength of it is really here. 

【You Zhixin】
 Next question is for professor, I saw the latest data that shows the China’s annual foreign trade volume just hit the high record in the 2022. And it is actually given the basis of complex, the Chinese economy both on the international situation. So do you still believe the China still remains as a world manufacturing center? Do you think that China's supply chain still remains resilient? 

【Josef Gregory Mahoney】
 To build on what Bertrand was saying, we know that there were two, let's say, two major headwinds for the Chinese manufacturing sector and global supply chains. The first obviously was COVID. And as he was saying, there was that initial period when the world really depended on China to produce the things that it couldn't produce. But there was another issue that goes back to the United States and this desire to try to affect some type of decoupling. Although, as you noted, we've seen trade volume actually increasing. But the idea there was initially that the United States might want to try to reassure some of its manufacturing, right? This was certainly a vision of Trump, less so with Biden, Biden’s focused more on high tech. But I think everyone felt vulnerable in that early phase of the pandemic where they were relying on China to produce the things that they needed to survive. And I think a lot of... if we look at the data, China is the largest trading partner of most countries in the world that's not gonna change significantly. But it is the case that, but many countries will want to diversify that they'll want to make sure that they don't have all their eggs in one basket, because sometimes policies in Beijing may shift. One of the things that we've seen is as some countries or some buyers have started to diversify, for example, if they're looking to buy their products now, out of Vietnam or India or other places, these supply chains are deeply connected to China as well. And in fact, a lot of times, these are Chinese factories or Chinese machineries or Chinese investment. But they're also connected. So even if we diversify, I think what we're looking at is a much more complicated global supply chain. I don't see the reassuring of manufacturing broad scale happening in the United States despite this sort of dream. China is going to remain, as he said, given it's got the most advanced industrial system in the world, it's gonna remain in the premier position. But it will need to do more to return to stability, to make sure that buyers and other countries feel secure, and will be able to forecast and limit volatility going forward. 

【You Zhixin】
For most of the companies, it's a mistake to like the short term to look at China's economy, but we should use a long term or medium term, the mindset, to look at the Chinese economy. So what's your view? 

【Bertrand Regnier】
 When I arrive in China, I think some of the people I met, they gave me some advice. And I think this advice they are still the same 14 years after which is when you are here, you basically think long term you cannot basically with the specific cities of the local market things, short term. I do believe that this foundation is still the case. However, I would say, and this is what the foreign investors are willing to, maybe to see predictability, which also has been a key pillar of their development and as help their development, because they knew actually what was happening. Because I think the leaders in China, they do what they say and they say what they do, which is very appreciated by foreign investors. This maybe, could be, we hope that may be enhanced after the reopening and after the measures. Because again, we are here advocate of the success of our respective countries.
 
 【You Zhixin】
So professor, what's your long term view for Chinese market?
 
【Josef Gregory Mahoney】
 I think when we talk about long term views from the perspective of politics, we start thinking about things like the 2035 development goal. The second 100 where you know clearly... China, I think more than any other country in the world, does have this long term vision and is certainly building towards it. And as we saw with the achievement of the first 100 and the establishment of the Xiaokang society. Whatever the headwinds are, China tends to find solutions to those crises and move forward. At the same time. We do know that there are these headwinds with the relationship of the United States. We know that we still have unresolved or unaddressed concerns related to climate change and extreme weather. And we know that this impacted the Chinese economy last year with the drought and the shortages and energy as well as the need to consume more energy because of the heat wave. So we are living in an era of black swans. A lot of the volatility in the world is not directly related to China. It's incidental to China. So we can talk about whether or not the Chinese economy is going to have some volatility this year. It probably will. But there will be volatility still associated with the conflict in Ukraine, with the slowdown in Europe, with the continued bellicose attitude from the United States. But long term, I believe China is a place to be, that's why I've made my home here. That's why I've raised my kids here. But, the next few years will be difficult. 

【You Zhixin】
 Yeah, your answer just reminds me of the theme of Davos. This time is called cooperation in a fragmented world. And next, as the China's economy uplifting, reshaping and changing, the market is becoming mature. So some of the successful stories of the multinational companies which have achieved success here, may now change to another story. So what's your view? 

【Bertrand Regnier】
 It is clear that what we see with foreign investment in China is that it's China for China, and basically most of the most successful players operating in China are successful because they understood basically the need of the Chinese consumer, the need of the Chinese customer. That is critical. You can no longer operate here to be exploring most of what you do. I think the key point is to serve the Chinese consumption. In a way that I think one of the purpose of the government is to develop and to enhance local consumption, which is going to be a key growth of the GDP, which is also why this market is so important. Into a qualitative growth, I would say what I've seen developing over the last years and we can take retail or we can take luxury as an example, is the way that basically most of the products now they are offered in the local market with exactly what the Chinese customers or consumers they need or they want. I think the brands have understood, right? And this qualitative growth with the help of the foreign investor, I think, is also something that I was mentioning in the last minutes. The qualitative growth and the long-term vision, I think they are coming together into best serving the interest of the Chinese consumer in the local market. 

【You Zhixin】
 So professor, do you think that if the company want to achieve success in China, they should use different mindset or different approaches? 

【Josef Gregory Mahoney】
 One of the things I'm a little bit concerned about is the intersection of two issues. The first is, obviously COVID created some contention. But as we all know, it prevented people from coming here, and it created some misunderstanding around the world. But at the same time, one of the other sort of major development that I think has been happening in China, that a lot of people are not fully aware of, and I don't know how you see this, is the tremendous steps forward that successful businesses in China have taken in terms of their multi-platform approaches to marketing. I don't think we see that same sort of sophistication in European markets, almost something comparable in the United States, but I think even in China, it's more advanced now. I'm a little concerned that foreign countries, foreign companies, if they try to come back and they try to build, or they try to invest, that they really need to study this sort of new model of marketing and doing business that has been continuing to actually accelerate because of the pandemic, whereas it wasn't even really driving to the same extent elsewhere. So I think if they can get good consultants, if they can get good advice, if they can get good models, they might be able to ramp up. But they're a little bit behind, I think. 

【You Zhixin】
 Another point you've just mentioned the geopolitical conflicts. If we take the U.S. chip act for example, which might causing the supply chain disruption in the world. So some people say that by the diversification of the supply chain might be the solution or the right choice. What's your opinion? 

【Josef Gregory Mahoney】
 I have a very specific opinion about the chips. I do think that it is a type of economic warfare. I do think it's trying to choke the Chinese economy and above all the Chinese high-tech development. And I think that China has a very strong case to advance this issue with the World Trade Organization. I'm not sure that the WTO will be able to really provide any relief for China on this issue, but I'm very confident in two aspects of China to deal with this type of problem. First, the Chinese political system is a system that is designed to deal with crises. It loves crises like this. I mean it doesn't love having them, but it's the type of system that gravitates to solving problems like this. I would expect the Chinese government to find solutions through diplomacy by working with other countries. And we know that a lot of countries around the world are not really excited about the American efforts here. Additionally, we have already seen reports that there are some new patent filings associated with Huawei. I do think that we'll see some technological breakthroughs that will make this problem disappear probably a lot sooner than the United States imagines. But another issue and this is a key focus of my research is that the United States really has a misunderstanding of technology. They think that they can just remove a chip or something like this. And this is gonna create some sort of crisis for China. But in fact, what China is a technological society, it's not just a society with technology, but it's the way the society functions together, how the government, how the people, how the industries, how all these things come together to solve problems like the outbreak, but also to solve problems that we see in terms of China now taking a leading position in green development, green energy, these types of (industries). So when you look at this capacity to solve problems technologically and for people to work together, in a technological way, I'm very confident that these kind of problems will be just minor slowdowns for China and its overall march forward. 

【You Zhixin】
 If we given the situation that we have met and as China optimize epidemic response, and do you think that is possibility to China have a faster and a stronger economic recovery growth? And for the global investors that should they keep investing in China? 

【Bertrand Regnier】 
 This is key and this is clear. That's gonna be the main change to our view. And this is what we hope in the year 2023 and for other. Why? Because as you said, when you give the theme of the World Economic Forum, it's about exchanging, it's about meeting again. It's about discussing face to face again. And this is how basically you build up confidence. This is how a country that you have not been during 3 years. Professor explained that you know lots of things have changed. It is very clear that during these 3 years with China being, we could say only on its own, no travel out has happened and no travel in has happened. And you know this has created a lot of questions at quarrels. I think most of our fortune 500 clients, they are really, really looking forward to come to China, to revisit their team, to better understand all the changes that have happened within the last three years to meet the government and to continue, basically to reinvest. Because this is what I said in the past. The market is very important. And we are talking about cooperation. And we can also talk about Chinese investment abroad, which has suffered from these last three years, which is going to be the same. I think China will need to continue and accelerate also on its foreign investment, not only on Yidaiyilu ( the Belt & Road Initiative), but also on other topics to be able to come back into the game. In a way that they will be seen. They will be able to discuss and to rebuild this kind of predictability (which) I was talking about... brand image, if I may say it like that and to still push into this long term vision that we helped the cooperation. 

【You Zhixin】 
Thank you for joining China Trends. Hope you enjoy today's podcast and any comments from you are welcome. See you next time and we'll bring you more fun conversations on what is happening in China.