How to better participate in opportunities of China’s opening up and high-quality development?

At the end of July, China welcomed visiting Italian Prime Minister Giorgia Meloni , marking the first visit by a European leader since the third plenary session of the 20th Central Committee of the Communist Party of China concluded. 

The visit comes at a time when China rolls out reform measures to achieve high-quality development and further opening-up after the plenary session.

A large business delegation accompanying Meloni to China also underscores the genuine needs for Italy’s diversified business community to enhance cooperation with China.

How could Italy and other countries better participate in the opportunities that China offers in pursuing opening up and high-quality development? Italian economist Michele Geraci has shared his thoughts with China Trends.

Guest :

Michele Geraci

Former undersecretary of state at the Italian Ministry of Economic Development,
Honorary Professor, School of Economics, Peking University,
Adjunct Professor of Finance, New York University, Shanghai

Transcript

【Zhu Jing】Hello, Mr. Geraci. Thank you very much for taking our interview. So, let's start from the first question about the just concluded CPC plenary session. As you know, since the reform and opening up in 1978, the Communist Party of China Central Committee's plenary sessions have always focused on reform issues. So, how do you see China's increasingly rich and deepening ties and interactions with the world in the process of its opening up? 

 【Michele Geraci】Thank you for the question. We have, those of us who have studied China’s reform since 1978, especially as foreign analysts, commentators and economists, we can actually say that China is the country that has more than others adopted policies, (and) reforms in response to the economic, social, and geopolitical tensions of the time. So, China has shown much more flexibility and the sense of adaptation than other countries that may be on the surface appear to have more of a multi-party political system. 

And instead, China, led by only one strong political party, is actually proven that within it, it can adapt much better and more successfully.    

So, we know that there are challenges. There have been challenges (in) every decade, and even every few years. China has encountered different challenges since opening up to now. Even recently, two years ago, many people were thinking that the real estate market would bring down the Chinese economy as it did happen in Europe and the U.S. in 2008. And it did not happen. So, I think that this is important. It's a flexibility of the Party to respond. It's more like a tactical measure that takes care of current situation. So, you have a good mix of policy and positive and successful implementation of those policies. 

 【Zhu Jing】So we just mentioned some policies and the plenary session. And I'm sure that you must get familiar with the new term that just brought out in this year, is called new quality productive forces. 

And also in this year's plenary session, it was stated that China will improve the institutions and mechanisms for fostering new quality productive forces in line with local conditions. So what do you think of China's proposal to promote the high quality development by fostering new quality productive forces? 

 【Michele Geraci】It is a positive development. Again, it responds to a challenge because we have seen over the last five years that the economy has suffered a little bit. In relative terms to China, still growing, but maybe with some challenges, with consumption not growing as fast as we were hoping. 

So these (new) quality productive forces, what does it mean? It means that the policy wants to unleash a little bit, even more the productivity potential of the Chinese citizens, of the Chinese enterprises, makes it easy for entrepreneurs, makes it easy for individuals, do not cap income, because we know that if we want to increase consumption, we need to increase income. So, still, within the framework of socialism with Chinese characteristics, unleash a little bit more of market forces. 

And again, as China has always done, I do not expect a revolution of policy, but of an evolution, crossing the river by feeling the stone. 

So, over the next 12, 18, 24 months, we will see how this policy plays. If they're successful, then they will be deepened and expanded. And this is good because it minimize the risk of the system getting out of hand. 

An important thing is also with local condition, because analysts make the mistake to analyze China on aggregate. But we know that we have provinces with different economic structures, with different needs. So, it is important that there is an umbrella: general central government policy. But then we also need to translate that policy into the needs and the capability of each province. 

So, even climate has an issue. We do know that the agricultural provinces of China are what they are. They cannot be changed. We know where we have dry places. We know where we have wet. And so, we also know that those regions may be more adaptive to agriculture, and others more to industrial development. Of course, there could be a mix of both, but of course the mix that would change from region to (region), from province to province. We also know there were province with very low income per capita like Guizhou, Yunnan, some of the lowest ones. And we do know now that there will be different policies they need to be done there as China did during the targeted poverty alleviation plan. The targeted alleviation plan was to get rid of the last few millions of people below poverty line. 

China’s leadership understood that it was okay to do the first, let's say, 800 million people with the overall opening up reform for the last 30 years. But to get rid of the last 25, 30 million poor people that was not enough anymore, needed to do targeted, which again means adapting a solution to the local needs. 

So, a policy targeted goal in Shanghai was different from the one in the Guangxi (Zhuang Autonomous Region). And that was one of the keys of the success. And that's why I like to hear again the word with the local condition. 

You make the job for us economists more interesting and more difficult. Because now we need to get deeper. I've always done it, but other, foreign analysts will find it more interesting and to dwell into each of the Chinese provinces. 

 【Zhu Jing】That's also very interesting for you to say it's a task both interesting and challenging, right? So, how do you evaluate China's achievements and prospects in promoting its high quality development?

【Michele Geraci】For me, quality development means innovation, technology, and improving both service, the secondary manufacturing, also agriculture. So, it is not just about services, but it's across all three sectors of the economy. 

And so in agriculture, we already have had better yields with better allocation of the soil, an allocation of the average land per capital with a little bit of flexibility on the exchange and the usage of land, shiyongquan(使用权, access) or suoyouquan (所有权, ownership). So that we can actually have a more and more larger scale agricultural production. On manufacturing, of course, we have  Made in China 2025. People don't talk a lot, very much about. But it’s still there. 

The sectors where China has already achieved some success. We're looking at quantum mechanics, semiconductors. So, these are the things that China already said that they would do 10 years ago. And now it is happening. And we do know that China’s semiconductor industry now is almost at par with that of Korea, with that of Intel, and sooner also at par with that of the Dutch company ASML. So, this is not just a piece of paper. It's a shuodaozuodao (说到做到, do what one says) and this is the key characteristic. 

And also the services, we know that we have logistics as a supporter to trade, we have digital payments, and then we have artificial intelligence. That is the software part that sits on top of the hardware. So, across all these sectors, this is what I see in quality, an improvement on the efficiency. I give another simple example because I come from Italy. Where trains are always late. But this is I talked to my Prime Minister, and actually the vice Prime Minister who's Minister of Infrastructure, Mr. Salvini, and making train on time. We unlock 2 to 3% of GDP, because we don't want people to wait on the platform, hanging there. Just in case the train is late and they need to leave early. In China, all of this does not happen. I arrive at the station three minutes before check-in. And this is way that China has unlocked value by improving the efficiency of transport. 

 【Zhu Jing】Also at this plenary session, some special plans were made for opening up, which will involve expanding institutional, opening up, deepening the foreign trade structural reform, further reforming the management systems for inward and outward investment and improving planning for regional opening up. 

So, Italy has advanced manufacturing capability and many well-known international brands. And also there are some small and medium sized Italian enterprises are also seeking development in China. In your opinion, what kind of new opportunities will these opening up initiatives bring for the development of Italian enterprises in China?  

 【Michele Geraci】The new initiative, hopefully, should facilitate, not just export, which is easy. But Italian investment in China, the problem that we have in Italy is that the almost all of our enterprises are very, very small SMEs, less than 15 people per company. So, these companies do not have the internal structure knowledge to really understand and analyze the complexity of the Chinese market. 

So, up to now, they have refrained from investing because the business risk that they have perceived is high. It’s high because the China is a difficult market. But it is also high because they do not have the resources to fully understand and analyze it. 

So, streamlining those procedures should lower the business risk for those Italian SMEs that they then would be more enticed to invest. For example, clarifying what sectors are allowed for foreign investment? What equity ownership? What about the repatriation of profit? What about the internal competition with Chinese companies? You know when companies go abroad that they're always afraid that they would suffer from the competition of local company because local company know the market better. So, that's a genuine risk. It is not about unfair competition. It's just that you arrive in a new place that you don't know, and your competitors have been there for 50 years. So, that's it. A usual challenge that people have. And that's why you know even FDI into China is high, but it's in the order of 150 to 180 billion. It's a very small percentage of the GDP of China. It does not contribute a lot of money, but you contribute a lot of know-how, resource management and similar things. 

So I think the government, in addition to announcing this policy, then should clarify the details of these policies which are not known yet. So, the concept is right, but the devil is in the details. And it's the job of the, I don't know if it's fagaiwei (发改委, National Development and Reform Commission) or other units to clarify and disseminate to the world and to Italian companies what are the new rules of the game.  

 【Zhu Jing】This year also marks the 20th anniversary of the establishment of China-Italy Comprehensive Strategic Partnership. How do you think China and Italy can further promote the development of economic and trade cooperation, green cooperation, and people to people exchanges? 

 【Michele Geraci】Here, you know I'm the one who took Italy into the Belt and Road, right? So the way that we build relationship is by moving forward, stepping forward. So, the relation between Italy and China goes back to 2,000 years. The Belt and Road was the Road that the Roman Empire were walking to trade between Europe and the Far East. The Belt and Road was then walked again 1,000 years later by Marco Polo. And now, years later again, we wanted to build a new Belt and Road. So, the way to build relationships is to move forward. 

I continue to live and work in China. For example, Italian exports continue to be strong in China, but we are losing, missing out on the opportunities for further advancement. So, saying that the things have not gone to zero is not enough. We needed to do more. And this more that we are not doing it. We needed to cooperate in the development of infrastructure in Africa. We need to cooperate with China on energy, supply and the production of energy sources. We need to work with China and the development of agriculture in Africa, Mozambique, Angola, and other countries. We need to cooperate with China on the stability and development of the Middle East. It was also transitioning from fossil economy to new green and service industry, even Saudi Arabia, Qatar, the (United Arab) Emirates, and we are not doing any of these things. 

We are doing now, like you say, the things that we were doing before, just export, but not really getting to a higher, to a new level of the relationship. But in relative terms, doing the same thing makes Italy go back, because other countries do more and more. Brazil is entering the Belt and Road next week. So, they do more. We do the same. So, on aggregate, we fall behind. But we do not fully participate in the opportunity that China offers. Because we keep on doing the same thing as before while all other countries do more and more. 

Not all, of course, some also have problems, but we have that. I look at the situation of my own country that doing the same thing with an economy that grows. It's not good. If China grows, and we do the same things we stay behind.

【Zhu Jing】And also in this session, China will refine the mechanisms for high quality cooperation under the Belt and Road Initiative. In a bigger landscape, what opportunities do you see in this for global trade and investment? 

【Michele Geraci】Very good opportunity. I tell you, for me, the Belt and Road is, let me clarify. It's not because I did it that I like it. I liked it, and therefore, I did it. Because I fully believe it is the most important infrastructure development plan of mankind. It's not about China, it's about the whole mankind has never happened something like this, of the scale, of this depth, (in) geographic and multi sectors. So, I think this is a god blessed opportunity. One of the best opportunities for the world to make money, make peace, and help develop low income countries to get rid of poverty, even in those areas like Africa and Asia that people’s standard of living is still very low. 

We have yidaiyilu (一带一路, the Belt and Road Initiative), so one road is by sea, and one road by land. The road by land is the most important, because when you build roads and land connectivity that you create a GDP in between. If you have a ship going from Shenzhen to Italy, there's no GDP in the sea. No, there's only GDP in Shenzhen and in Italy, but not along the route. 

But the idea of building railway, motorways, bridges in the land, in central Asia, in southeast Asia, and in Africa, it could almost be such improvement in the growth in the GDP could pay for the development of infrastructure, almost as if transferring goods would be free. 

So, this is the idea that I have. We will completely zero the cost of transport because it will be repaid by its improvement. Last month, I took the railway between Kunming and wanxiang(万象, Vientiane) in laowo(老挝, Laos), the new high speed rail between China and Laos. And it has changed completely the economy of those places in Laos already, only after one year, one year and a half. You have more tourists, you have more trade. It's a transition into Thailand and then into Malaysia and then into Singapore and so on. So, this is the things that development by land that truly bring economic and social development in the countries that are affected. So, for me, it's exactly what the world needs now.

It's an initiative of peace, of economic development and social development, a big win for all the 150 countries in the Belt and Road, including Brazil who joins now. 

【Zhu Jing】So, it's like where the road goes, the countries along the road will enjoy the benefit that it that it brings. So, you're still very positive about the development of the Belt and Road Initiative. 

【Michele Geraci】Yes, absolutely. Even more positive than before. Do you know why? Because we know we had problems on the Belt and Road, you know some problem with that things, people not pay. It's okay. It's normal. Now we know those problems and we won't do them again.

I am more positive and the critics of the Belt and Road exaggerated. They are right to point problems and challenges. Because when we know the problem, the challenges we can address them, we solve them. And next time we don't do the same mistakes again. So, the quality it's like a Darwinian process, the quality improves with time. So, the more projects we do, the better the average quality. And I think another thing it's not competing with the EU global gateway, or where the U.S. build better world. There is rumor for everyone. The need for infrastructure development in the world is infinite. So, the European Union wants to do its own initiative, if the U.S. wants to do its own initiative, it's fine. I also support those. They are not competing with the Belt and Road. It's even better that there is more to do the same thing. 

【Zhu Jing】Thank you very much. Thank you for taking our interview and share these very insightful thoughts with us.

【Michele Geraci】Okay then. Bye bye. Thank you. Bye. Thank you.